APPENDIX C

FIXED VERSUS VOLUME VARIABLE COSTS

The universal service obligation and the nature of postal operations require a significant infrastructure investment. Due to this infrastructure, over 40 percent of total postal costs are fixed. Examples include most of the cost related to more than 38,000 Post Offices, stations and branches, 244,000 delivery routes, and 212,000 vehicles. Technology infrastructure and other overhead costs are also partially fixed.

Fixed costs are those costs that the Postal Service incurs regardless of changes in mail volumes and operations. Volume variable costs are those that change with mail volumes and operational activities. Contribution (margin) is the difference between the revenue from a class of mail and its volume variable costs.

The fixed cost nature of postal operations is demonstrated in two ways by carrier costs. First, carrier costs do not vary with volume changes since carriers will stop at most of the homes and businesses on their routes regardless of the volume to be delivered. Changes in total delivery costs are not proportionate to changes in volume. Statistical analyses have shown that a 10 percent increase (or decrease) in volume leads to a little less than a 5 percent increase (or decrease) in total delivery costs. $12.8 billion of the $24.8 billion delivery-related costs were fixed in 2004. Second, the normal growth in the number of delivery points (residences and businesses) increases the number of routes and carrier costs. Holding total volumes constant, growth in the number of delivery points raises the average cost per piece of mail delivered. Mail volumes must grow at the rate of the increase in delivery points just to keep average delivery costs per piece constant.

The universal service obligation contributes significantly to fixed costs. Carriers travel their complete routes, making over 600 million new delivery stops annually (2 million new delivery points multiplied by the annual number of delivery days), trucks transport mail between facilities each day to meet service commitments, and retail facilities are open each business day no matter what level of activity occurs.