FEDEX Corporation Form 10-K Analysis Jeffrey D. Simmons Ashford University BUS 630: Managerial Accounting Professor Dr. Isabel Wan September 5, 2011 Abstract This paper has several goals. First, the managerial accounting question to be analyzed is business strategy. Utilizing financial reports management is able to analyze forward-looking statements of FEDEX Corporation current expectations based on their 2005 10K form.
The final goal is to establish qualified information relative to business strategy and accounting practices that will enable management’s business decision with reference to industry share, total industry growth, and profits. What is FedEx’s 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? FedEx’s strategy for success in the market place relies on a combination of customer intimacy, operational excellence and product leadership customer value proposition.
Evidence of customer intimacy and operational excellence is found in FedEx’s 2005Form 10-K which states “to provide our customers with convenient, seamless access to our entire portfolio of integrated business solutions. We are pursuing a number of initiatives to continue to enhance the FedEx customer experience, including improving the capabilities of our sales professionals. For instance, through our FedEx One Call program, we assign a single customer service agent to handle virtually all issues of a customer’s account” (p. ). Further evidence of customer intimacy is found in the statement that each of FedEx’s business segments operates independently because this strategy allows each segment to anticipate and respond to customer FedEx 3 demands (FedEx Form 10-K 2005, p. 4). Additional evidence of operational excellence is in FedEx’s 10-K where they state they are leader in reliable rapid global delivery of packages, documents and freight and further specialized services such as customs-clearance with a money back guarantee (p. 9).
Evidence of product leadership customer value proposition is found in FedEx’s statement that “We believe that seamless information integration is critical to obtain business synergies from multiple operating units. For example, our Web site, fedex. com, provides a single point of contact for our customers to access FedEx Express, FedEx Ground and FedEx Freight shipment tracking, customer service and invoicing information and FedEx Kinko’s office and print services” (FedEx Form 10- K 2005, p. 4). What are FedEx’s four main business segments?
Provide two examples of traceable fixed costs for each of FedEx’s four business segments. Provide two examples of common costs that are not traceable to the four business segments. FedEx’s four main business segments are FedEx Express, FedEx Ground, and FedEx Freight and FedEx Kinko’s (FedEx Form 10-K 2005, p. 3). If the segment disappears so does the cost. “A common cost is incurred to support the operations of multiple segments and is not traceable in any way or part to a particular segment” (Noreen, Brewer and Garrison, 2008, p. 446). If a particular segment disappears the cost remains and should not change.
One traceable fixed cost for FedEx Express would include the cost to operate their facilities at Memphis International Airport which include aircraft maintenance hangars, flight training and fuel facilities, administrative offices and warehouse space (FedEx Form 10-K 2005, p. 24). Another example of traceable fixed cost for FedEx Express would be the cost involved in owning 557 airplanes (FedEx Form 10-K 2005, p. 22). Traceable costs for FedEx Ground would include the cost to operate their offices and information data centers which are located in the Pittsburgh and owned by FedEx Ground (FedEx Form 10-K 2005, p. 5) and the cost of FedEx Ground’s President and CEO Daniel Sullivan’s salary (FedEx Form 10-K 2005, p. 29). FedEx Freight’s traceable costs could include the cost of owning 39,500 vehicles and trailers and the cost of operating their customs-critical headquarters in Green, Ohio (FedEx Form 10-K 2005, p. 26). FedEx Kinko’s would have traceable costs that include the cost of operating their 1,290 Office and Print Center as well as the salary of Gary M. Kusin who is the President and Chief Executive Officer of FedEx Kinko’s (FedEx Form 10-K 2005, pp. 17 & 27).
One example of common costs not traceable to the four business segments would include anyone of the PGA golf tournaments FedEx sponsors (FedEx Form 10-K 2005, p. 19). A second example would be the salary of Frederick W. Smith who is the CEO of FedEx (FedEx Form 10-K 2005, p. 26). Identify one example of a cost center, a profit center, and an investment center for FedEx. The following table represents the control a manger has in a particular center. Information is taken from Noreen, Brewer and Garrison (2008, p. 439-440). Costs Revenue Investment funds
Cost center Y N N Profit center Y Y N Investment center YY Y An example of a cost center for FedEx is FedEx Express’s primary sorting facility which is located in Memphis, Tennessee (FedEx Form 10-K 2005, p. 11). FedEx Kinko’s Office and Print Centers would be examples of profit centers (FedEx Form 10-K 2005, p. 17). The four main business segments of FedEx would be considered investment centers. Provide three examples of fixed costs that can be traceable or common depending on how FedEx defines its business segments. The salary of FedEx Express CEO David J.
Bronczek is traceable to the FedEx Express business segment but is common to the ten sorting and handling facilities that FedEx Express operates (FedEx Form 10-K 2005, pp. 24 & 26). The cost of operating one of the above sorting and handling facilities is traceable to that specific facility but the cost of operating the specific facility is common to all trucks dropping off or delivering packages. The salary of Executive VP T. Michael Glenn would be traceable to FedEx’s Market Development and Communications departments but would be common to FedEx’s four business segments (FedEx Form 10-K 2005, p. 7) Compute the margin, turnover, and return on investment (ROI) in 2005 for each of FedEx’s four business segments (Hint: page 99 reports total segment assets for each business segment. ) (Dollar values 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 (2005) $13,130 $2,776 $2,047 2,987 Segment assets (2004) $12,443 $2,248 $1,924 $2,903 Avg operating assets $12,787 $2,512 $1,986 $2,945 (2004+2005)/2 Margin (operating income / sales) 7. 3% 12. 9% 11. 0% 4. 8% Turnover 1. 52 1. 86 1. 62 0. 70 (Sales / Avg operating assets) ROI (margin * turnover) 11. % 24. 0% 17. 8% 3. 4% ROI (net op income/ Avg op assets) 11. 1% 24. 0% 17. 8% 3. 4% 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 FedEx’s four segments. Residual income “is the net operating income that an investment center earns above the minimum required return on its operating assets”. (Noreen, Brewer and Garrison, 2008, p. 459). $ values in millions) FedEx Express FedEx Ground FedEx Freight FedEx Kinko’s Average operating assets (a) $12,787 $2,512 $1,986 $2,945 Net operating income $1,414 $604 $354 $100 Min return 15% * (a) $1,918 $377 $298 $442 Residual Income (loss) ($504) $227 $56 ($342) 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? The ROI of the $20 million investment option is 20% (20,000,000 /4,000,000). FedEx Ground reports a ROI of 24%.
In my opinion it would not make sense for the FedEx Ground managers if evaluated on ROI to pursue this investment option because the ROI for this investment is less than 4% of their current ROI. On the other hand if FedEx Express managers are evaluated on ROI they should pursue this investment opportunity because the investment ROI of 20% is greater than their previously calculated ROI of 11. 1%. Consequently, this investment would increase the organizations overall ROI. In my opinion both managers of each business segment should pursue this investment opportunity provided they are evaluated using residual income. Below shows how this investment opportunity would increase the residual income of both segments by $1 million. $ values in millions) FedEx Express FedEx Ground Residual Income previously calculated (loss) ($504) $227 Additional operating income (investment) $4 $4 Required ROI new investment (15*20) $3 $3 Residual Income (loss) from investment $1 $1 Residual Income (loss) after investment ($503) $228 References Byers, Steven S. , Groth, John C. & Wiley, Marilyn K. (1997). The critical operating cycle. Management Decision, 35(1), 14-22. Retrieved August 22, 2011, from Research Library. (Document ID: 117543012) Noreen, E. W. , Brewer, P. B. , Garrison R. H. (2011). Managerial accounting for managers (2nd ed. ). New York, NY: McGraw Hill. United States Securities and Exchange Commission. (2005, May). Form 10-K FedEx Corporation. Retrieved August 31, 2011, from http://www. sec. gov/Archives/edgar/data/1048911/000110465905032464/a05- 11806_110k. htm