Tag Archives: Management accounting

Why The Post Office Might Choose To Continue Delivering Amazon Packages While It Loses Money On The Contract

If you support the United States Postal Service, you must have experienced mixed feelings about last week’s fiscal announcement. On the one hand, package volume increased significantly over last year’s comparative levels. But on the other hand, financial losses worsened significantly.

Huh? How can an organization serve more customers and yet suffer more losses? There are usually two possible reasons why such a mixed outcome is possible. The first is that the entity may be losing money on each customer served, and thus more volume generates worse financial results. And the second is that the entity may be facing a problem that is unrelated to customer volume, and that is suddenly generating losses.

Evidently, President Trump has not taken a position on this question, having simply tweeted that “Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed.

But the President has not considered the possibility that the Post Office might choose to continue its relationship with Amazon while it continues to incur losses on the contract. Why? Imagine, for the sake of argument, that you decide to pay freelance drivers to deliver packages in competition with the Postal Service.

Let’s assume that your only significant operating payments are $100 per day to rent a small office, and $10 per delivery for each service rendered. You charge and collect $15 per delivery, and thus earn a gross profit of $5 per delivery before paying the rent. You would thus need to deliver 20 packages per day to pay the rent and break even.

That arithmetic is not difficult to follow, is it? But now let’s assume that Amazon offers to guarantee you $600 per day to deliver 50 packages. You might estimate that you’re charging your customer $12 per package. On a per-delivery basis, that’s a loss of $3 in comparison to your normal $15 price!

But now look at the situation in total. You’ll earn $600 from Amazon alone. You’ll pay $100 in rent and $500 (i.e. 50 packages @ $10) for deliveries, yielding total payments of $600. You’ll actually enjoy a guarantee of breaking even on the Amazon contract alone! And you’ll start to earn a profit on the very first package that you deliver for any other party.

So when you read that the Postal Service is losing money on its Amazon deliveries, it may indeed be true. And yet, perhaps paradoxically, the government agency might choose to continue serving Amazon while it loses money on the contract.

Why? Because, as we can see from our example, it might be reasonable to do so.

The Congressional Busy Season

As you probably already know, the current United States Congress ranks among the most dysfunctional in history. Given its state of inactivity, is it possible that our local legislators might be growing bored and fidgety with all of their free time?

Don’t count on it! Apparently, our elected officials aren’t concerned about their failure to pass productive legislation. Instead, they are spending their time proposing legislation that has no chance to pass into law, and passing legislation that serves no purpose.

Last week, for instance, the U.S. House of Representatives passed H.R. 4890, the IRS Bonuses Tied to Measurable Metrics Act. If enacted into law, it would forbid the Internal Revenue Service from paying any bonus compensation to its employees until it “puts taxpayers first.”

At first glance, of course, one might conclude that this Act is a reasonable one. After all, why should any employee receive a bonus if he doesn’t put his customer, client, or constituent first?

The problem with the proposed legislation, though, is that it bans the payment of bonuses to any IRS employee. In other words, the Service would be unable to recognize, incentivize, or reward any individual employee who wishes to “put taxpayers first.” Under such circumstances, why would any employee actually choose to do so?

The proposed Act itself serves no purpose because President Obama has already declared that he would never sign the legislation. But Congress passed it any way, and then moved on to a proposal entitled No Budget, No Pay. Sponsored by Senator Dean Heller of Nevada, the Act proposes that Congressional leaders should not be paid any compensation when they fail to enact a federal budget into law on a timely basis.

But … hold on! Wait a minute! Didn’t President Obama sign a No Budget, No Pay Act into law three years ago? Well, yes … he did. But it only applied to that single year of budgetary activities. And it didn’t actually require Congress to fund its own budget; it simply required that the legislators pass a resolution to approve one. So Congress proceeded to approve a budget that year, and then never funded it.

Apparently, our legislators are quite fond of “no pay” legislation. But in the case of the IRS law, they proposed it while knowing that there was no chance of it ever becoming law. And in the case of their own budget law, they passed it with terms and conditions that would ensure that they would never actually lose any pay.

Nice, eh? It’s the Congressional busy season, and our legislative leaders are busy at work, doing what they do best.