BUS 630-Week 5 Written Assignment-FedEx

Week 5 Written Assignment “FedEx”

Noel Jones

BUS: 630 Managerial Accounting

Karen Smith

May 13, 2012

FedEx

1. FedEx’s strategy for success in the marketplace is product leadership customer value proposition, and is achieved through FedEx’s operational excellence. This is supported by the statement, “We intend to continue leverage and extend one of our greatest assets, the FedEx brand, and to provide our customers with convenient, seamless access to our entire portfolio of integrated business solutions. For instance, through our FedEx One Call program, we assign a single customer agent to handle virtually all issues of a customer’s account”. (FedEx 10-K, 2005; p. 4). Another important detail, “We believe that seamless information integration is critical to obtain business synergies from multiple operation units. For example, our Website, fedex.com, provides a single point of contact for our customers to access FedEx Express, FedEx Ground, FedEx Freight shipment tracking, customer service, and invoicing information and FedEx Kinko’s office and print services.”

2. There are four main business segments and they are as follows: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Kinko’s.

Two traceable fixed costs for each of the four business segments are as follows:

FedEx Freight- (1) The salary of the office manager at the administrative office in San, Jose California; (2) Depreciation on the fleet freight vehicles.

FedEx Express - (1) Cost to operate the World Headquarters in Shelby County, Tennessee; (2) cost to lease the facilities that house FedEx personnel.

FedEx Ground – (1) Costs to run the information and data centers located in Pittsburgh, Pennsylvania; (2) The insurance required to run the owner-operated vehicles.

FedEx Kinko’s – (1) The Ship Centers’ manager’s salary; (2) Depreciation on the copy and print machines.

3. An example of a cost center is the 321 service centers of FedEx Freight.

An example of a profit center is FedEx Kinko’s office and print centers.

An example of an investment center is each of the four subsidiaries; FedEx Express, FedEx Freight, FedEx Ground, and FedEx Kinko’s.

4. The fees associated with the landing of the planes can become common if FedEx chose to break down the fees into overnight deliveries and two-day express deliveries. This could also be done for the insurance costs and maintenance of the fleet of vehicles that FedEx and its subsidiaries have.

5. Margin, Turnover, and Return On Investment (ROI)

(In Millions)	FedEx Express	FedEx Ground	FedEx Freight	FedEx Kinko’s
Sales	$19,485	$4,680	$3,217	$2,066
Operating Income	$1,414	$604	$354	$100
Segment assets
2004	$12,443	$2,248	$1,924	$2,903
2005	$13,130	$2,776	$2,047	$2,987
Average Operating Assets*	$12,787	$2,512	$1,986	$2,945
Margin**	7.3%	12.9%	11%	4.8%
Turnover***	1.53	1.86	1.62	0.70
ROI****	11.1%	245%	17.8%	3.4%

*(2004+2005)/2

**Net Operating Income / Sales

***Sales / Average Operating Assets

****Net Operating Income / Average Operating Assets, OR, Margin x Turnover

6. Residual Income

(In Millions)	FedEx Express	FedEx Ground	FedEx Freight	FedEx Kinko’s
Average Operating assets	$12,787	$2,512	$1,986	$2,945
Net Operating income	$1,414	$6044	$354	$100
Minimum required return*	$1,918	$377	$298	$442
Residual Income (loss)**	$(504)	$227	$56	$(342)

*Average Operating assets @ 15%

**Net Operating income – Minimum required return

7. When figuring the ROI with the investment, the calculation would be $20 million / $4 million. This would equal 5 or 20%. Now, reviewing the figures from question 6, it would not be recommended for FedEx Ground to accept the investment because the investment ROI of 20% is 4% below the current ROI of 24%; Although it would be recommended for FedEx Express because they current ROI is only 11.1% and would be raised by 8.9% to reach the investment amount of ROI, 20%.

(In Millions)	FedEx Express	FedEx Ground
Operating income from investment	$4	$4
Required ROI from investment*	$3	$3
Residual income from investment	$1	$1
Residual income prior to investment	$(504)	$227
Residual income after investment	$(503)	$228

*$20 million @ 15%

Yes, the managers of both segments should pursue the investment opportunity because, as shown above, the residual income will raise both segments by $1 million.

References

Noreen, E., Brewer, P., & Garrison, R. (2011). Managerial Accounting for managers. (2nd ed.). New York: McGraw-Hill Irwin.

United States Securities and Exchange Commission. (2005). FedEx Corporation: Form 10-K. Retrieved on May 10, 2012 from http://www.sec.gov/Archives/edgar/data/1048911/000110465905032464/a05- 11806_110k.htm#Item5_MarketForRegistrantsCommonE_235807