Question

Charles Schwab Corporation is one of the more innovative brokerage and financial service companies in the United States. The company recently provided information about its major business segments as follows (in millions):

	Investor Services		Advisor Services
Revenues	$2,910		$1,603
Income from operations	1,044		179
Depreciation	101		62

a. The Investor Services  segment serves the retail customer, you and me. These include brokerage, Internet, and mutual fund services. The Advisor Services  segment includes the same services provided for financial institutions, such as banks, mutual fund managers, insurance companies, and pension plan administrators.

b. Indicate whether the following costs are a “Variable Cost” or a “Fixed Cost” in the “Investor Services”.

1. Commissions to brokers Variable Cost
2. Fees paid to exchanges for executing trades Variable Cost
3. Depreciation on brokerage offices Fixed Cost
4. Transaction fees incurred by Schwab mutual funds to purchase and sell shares Variable Cost
5. Property taxes on brokerage offices Fixed Cost
6. Advertising Variable Cost
7. Depreciation on brokerage office equipment, such as computers and computer networks Fixed Cost

c. Estimate the contribution margin for each segment, assuming that depreciation represents the majority of fixed costs.

	Investor Services (in millions)	Advisor Services (in millions)
Estimated contribution margin	$	$

d. If Schwab decided to sell its Advisor Services business to another company, estimate how much operating income would decline under the following assumptions.

Assume the fixed costs that serve the Advisor Services business would not be sold but would be used by the other sector: $ million?
Assume the fixed assets were “sold”: $ million?

Answer 1

1) Variable cost

2) Variable cost

3) Fixed cost / period cost

4) Variable cost

5) Fixed / period cost

6) Variable cost

7) Fixed cost

c)

	Investor Service	Advisor service
Revenue (a)	2910	1603
income from operation (b)	1044	179
Depreciation (c)	101	62
Contribution (d)( b+c)	1145	241
Contribution ratio (d/a)	0.393	0.150

Income from operation is calculated after deduction of depreciation.

And depreciation is fixed cost

But in contribution we only deduct variable cost/

So if in income from operation we will add depreciation we will get contribution

Sales - variable cost = contrbution - fixed cost = profit

So contribution = profit + fixed cost( depreciation in our case )

d) Sell : fixed cost not sold

	Investor business
Operating Income	1044
Less: Fixed cost of advisor	62
Reduced operating income	982

Sell: Fixed cost sold

Then there will be no change in operating income of investor business