Fedex

Federal Express Case 2

Question 1: If Federal Express could sell only one additional unit of product (i.e. Courier Pak at a 66% contribution margin, Priority One at a 55% contribution margin or Standard Air at a 27% contribution), which one unit should Federal Express sell one more of Courier Pak, Priority One or Standard Air? Base your analysis solely on the financial information provided in the case.

Response:

Based on the information provided in the case and the table built below I would recommend that Federal Express sell one more unit of the Priority One product.

Courier Pak Priority One Standard Air

Contribution Margin as a % 66% 55% 27%

Average Unit Price $12.50 $23.56 $12.62

Contribution Margin as a $ $8.25 $12.96 $3.41

My recommendation is based on the fact that although the Courier Pak had great potential and sales have doubled in the past year it still only represented less than 10% of the total overnight packages for FEC and barely 5% of the overnight dollar volume. As seen in the table above if you were to take a quick look at the information provided in the case and only noted the contribution margin %’s you would probably identify the Courier Pak as the one additional product to sell because it reports the highest percentage.

The case also provides the average unit price for the three products. The Courier Pak and Standard Air product’s average unit price were very close at $12.50 and $12.62 respectively. Between these two we would choose the Courier Pak because the contribution is much higher allowing 39% more of the average unit price go toward paying fixed expenses.

I chose the Priority One product even though it has a ~11% lower contribution margin than the Courier Pak as a percentage of the average unit price. The reason is because the average unit price of the Priority One product is $11.06 higher than the Courier Pak. That $11.06 dollar difference translates...