FedEx Corporation 1

FedEx Corporation Sean P. Dixon Business 630: Managerial Accounting Instructor: Oscar Lewis June 20, 2011

FedEx Corporation 2 Fed-Ex Corporation The questions in this exercise are based on FedEx Corporation. To answer the questions you will need to download FedExs Form 10-K for the fiscal year ended May 31, 2005 (file date July 14, 2005). 1. What is FedExs strategy for success in the marketplace? Does the company rely primarily on a customer intimacy, operations excellence, or product leadership customer value proposition? What evidence supports your conclusion? Answer: Product leadership customer value proposition through operational excellence is the strategy that the FedEx Corporation uses for their success in the marketplace. The use of this strategy is supported by the services portfolio that the company provides to its clients. According to FedEx, this portfolio aims to provide its customers with convenient, seamless access to our entire portfolio of integrated business solutions (2005). The FedEx Corporation manages its business as a portfolio which allows it to attain operational excellence. They attain this excellence by benchmarking practices in the different business segments. Each business segment offers value to their own customer base as they focus on that market. 2. What are FedExs four main business segments? Provide two examples of traceable fixed costs for each of FedExs four business segments. Provide two examples of common costs that are not traceable to the four business segments. Answer: FedExs four main business segments are as follows along with two examples of traceable fixed costs for each segment: 1. FedEx Express. Traceable fixed costs are the salaries of product or service managers and depreciation costs of its transportation fleet.

FedEx Corporation 3 2. FedEx Ground. Traceable fixed costs are salaries of its sales people selling its supply chain solutions and advertising expenses for its services. 3. FedEx Freight. Traceable fixed costs are depreciation for its freight fleet and salaries of its fleet pilots. 4. FedEx Kinkos. Traceable fixed costs are depreciation for its office and printing equipment and salaries of its personnel. Two common costs not traceable to the four segments are: 1. The salary of the CEO of FedEx. 2. The salary of the CFO of FedEx. 3.Identify one example of a cost center, a profit center, and an investment center for FedEx. Answer: An example of a cost center for FedEx is their Information Technology department. An example of a profit center for FedEx is one of the Kinkos global network offices. An example of an investment center for FedEx is the corporate headquarters for the company. 4. Provide three examples of fixed costs that can be traceable or common depending on how FedEx defines its business segments. Answer: 1. Landing fees for its airlines. These fees can become common if FedEx considers to breakdown its FedEx Freight segment into next-day, second-day, and inter-regional less than truckload. 2. Costs of maintaining fleets. This cost would be traceable to its business activities that use it, but common to business segments which share the same.

FedEx Corporation 4 3. Salaries of call center personnel. These salaries would be traceable to a segment, but common if the call center cost attributable to each of the services of that segment is computed. 5. Compute the margin, turnover, and return on investment (ROI) in 2005 for each of FedExs four business segments (Hint: page 99 reports total segment assets for each business segment.) Answer: Profit margin = net income/sales Asset turnover = sales/total asset Return on investment = net income/total assets OR profit margin x asset turnover Segment Express Ground Freight Kinko Revenues $19,845 $4,680 $3,217 $2,066 Operating Income $1,414 $604 $354 $100 Assets $13,130 $2,776 $2,047 $2,987 Margin 7.13% 12.91% 11.00% 4.84% Turnover 1.51 1.69 1.57 0.69 ROI 10.77% 21.76% 17.29% 3.35%

6. Assume that FedEx established a minimum required rate of return of 15%for each of its business segments. Compute the residual income earned in 2005 in each of FedExs four segments. Answer: Express $13,130 $1,414 $1,970 $-556 Ground $2,776 $604 $416 $188 Freight $2,047 $354 $307 $47 Kinko $2,987 $100 $448 $-348

Ending Book Value Net income Less 15% x BV Residual income

FedEx Corporation 5 I had to use the segment assets to compute the book value for each segment since the segment liabilities and equity were not reported for each segment. Residual Income = Net Income (ending book value x 15%) 7.Assume that the senior managers of FedEx Express and FedEx Ground each have an investment opportunity that would require $20 million of additional operating assets and that would increase operating income by $4 million. If FedEx evaluates all of its senior managers using ROI, would the managers of both segments pursue the investment opportunity? If FedEx evaluates all of its senior managers using residual income, would the managers of both segments pursue the investment opportunity? Answer: FedEx Express New ROI: (1,414+4)/(13,130+20)=10.78% FedEx Ground New ROI: (604+4)/(2,776+20)=21.75% If FedEx evaluates its senior managers using ROI, then only Ground gets the funding as its ROI is more than the required minimum rate of return. FedEx Express: Additional residual income: 4 (20 x 15%) = 1 FedEx Ground: Additional residual income: 4 (20 x 15%) = 1 If FedEx evaluates its senior managers using residual income, then both segments will pursue the project as there is a resulting incremental residual income

FedEx Corporation 6 References FedEx Corporation (2005, May 31). Form 10-K. United States Securities and Exchange Commission (SEC). Retrieved from http://www.sec.gov/Archives/edgar/data/1048911/000110465905032464/a05-11806_110k.htm