I<\/span>t<\/strong> seems like a straightforward question: Is the U.S. Postal Service making or losing money on its package delivery contract with Amazon \u2014 you know, the one President Trump can\u2019t stop tweeting about? To answer it, all you need to do is start with the Postal Service\u2019s revenue from Amazon, subtract all the expenses associated with delivering the Amazon packages and \u2014 voila! \u2014 you either get a positive number (a profit) or a negative one (a loss). Accounting 101.<\/p>\n

As with most interesting questions, however, this one turns out to be more complicated than that.<\/p>\n

For starters, other than Amazon and the Postal Service, almost nobody \u2014 including Trump \u2014 knows for sure what the revenue from the contract is. Analysts have estimated that Amazon uses the Postal Service for 40 percent of its shipping and that the per-package cost works out to roughly $2, or about half of the standard rate charged by other big shippers. One reason the Postal Service is willing to give Amazon such a big discount is the huge volume of deliveries that the contract guarantees \u2014 a key factor in business with high fixed costs. Another is that Amazon performs a fair amount of the shipping work itself, arranging the packages by Zip code and carrier route and dropping them off on pallets at one of 20 Postal Service distribution centers\u00a0across the country. (Amazon founder and CEO Jeffrey P. Bezos owns The Washington Post.)<\/p>\n

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The trickier challenge, however, is figuring out what it costs the Postal Service to deliver those presorted packages from the distribution centers to millions of households and businesses.<\/p>\n

If the Postal Service had set up a new, dedicated fleet of trucks and delivery personnel to work exclusively on the Amazon account, that would be a fairly easy number to come up with. And if that were the case, it\u2019s a good bet that a contract charging $2 per package would be a money loser.<\/p>\n

But that\u2019s not what happened. When it sat down to negotiate its deal with Amazon, the Postal Service, in its role as the government-designated postal monopoly, was already required to stop by every home, business and rural post box six days a week, and already had the workforce and infrastructure to do that. In that context, the additional \u2014 or \u201cincremental\u201d \u2014 cost of delivering the additional Amazon packages would be much more modest. It might involve a few more trucks here and there, or the cost of buying slightly larger trucks than would otherwise have been needed. Perhaps additional delivery personnel would be necessary to accommodate the higher volumes Monday through Saturday. And there\u2019s the extra overtime for providing the service on Sundays, which Amazon required. Looked at from the standpoint of incremental revenue (huge) minus these incremental expenses (modest), the Postal Service could very easily have come to the conclusion that, even at $2 a package, the Amazon contract was likely to be highly profitable.<\/p>\n

So who is right? Is Amazon getting a sweetheart deal, as Trump protests, one that it could never have gotten from UPS or FedEx? Or, as the Postal Service contends, does the Amazon contract allow it to reduce its annual operating deficit and put itself on a more solid financial footing?<\/p>\n

The answer, it turns out, is that both are right. In a very real sense, the arrangement is a win-win proposition, a great deal for both Amazon and the Postal Service.<\/p>\n

Of course, we still haven\u2019t exactly answered the larger accounting question, whether the Postal Service is making or losing money on the Amazon contract. Using short-term incremental accounting \u2014 incremental revenue minus incremental costs \u2014 the Amazon contract certainly looks profitable. But any enterprise that uses only short-term incremental accounting to price its products would, over the long run, probably find itself out of business. That\u2019s because incremental cost accounting ignores the common costs (or what the Postal Service calls \u201cinstitutional\u201d costs) that can\u2019t easily be attributed to any one customer or any one line of business \u2014 regular first-class \u201cletter\u201d mail, for example, or second-class newspapers and magazines, or third-class catalogues.<\/p>\n

Indeed, under federal law, the Postal Service must not calculate only the incremental costs and revenue associated with any special contract or any of its lines of business when calculating costs. In setting rates, it must determine the full cost of providing the service by assigning an appropriate share of the common, or \u201cinstitutional,\u201d costs.<\/p>\n

You could reason, for example, that since the postal worker was coming by my house to deliver a birthday card from Aunt Millie, it doesn\u2019t add much cost for the postal worker to drop off a catalogue from Orvis and a paperback book from Amazon while he is there. But does that mean you should charge Aunt Millie the full cost of sending a postal worker to my house, while charging Orvis and Amazon only the incremental cost of adding their material to Aunt Millie\u2019s delivery? Federal law says no \u2014 that in setting rates for Orvis and Amazon, the Postal Service should assign to them an appropriate share of the cost of the postman\u2019s visit.<\/p>\n

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