Question

Charles Schwab Corporation (SCHW) 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	$5,411		$2,067
Operating income	2,031		962
Depreciation	180		54

a. The Investor Services  segment serves the retail customer, you and me. These are the brokerage, Internet, and mutual fund services used by individual Investors. 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” segment.

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. Depreciation on brokerage office equipment, such as computers and computer networks Fixed Cost
7. Advertising Variable Cost

c. Estimate the contribution margin for each segment, assuming 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” accounts to another company, estimate how much operating income would decline under the following assumptions.

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

Answer 1

Estimating contribution Margin :
Segments	Investor services	Advisor Services
	($ in millions)	($ in millions)
Revenue	5,411	2,067
Less: Variable cost	3,100	1,001
Contribution Margin for each segment	2,311	1,066
Working notes:
1) It is noted that fixed cost are only in the nature of depreciation and property tax.
It is assumed that municipal tax is $ 100 and $ 50 for investor services and advisor
services respectively. So variable cost for these two segment are as following:
Segments	Investor services	Advisor Services
	($ in millions)	($ in millions)
Operating expenses (Revenue - operating income)	3,380	1,105
Less: Depreciation	180	54
Less: Municipal tax	100	50
Variable Cost	3,100	1,001
Estimating contribution Margin :
Segments	Investor services	Advisor Services	Total
	($ in millions)	($ in millions)	($ in millions)
Revenue	5,411	-	5,411
Less: Operating expenses (only fixed cost for advisor services)	3,380	104	3,484
Operating income	2,031	-104	1,927
Earlier operating income	2,031	962	2,993
Reduced operating income ( Earlier op. income - new op. income)	-	1,066	1,066
% of operating income reduced (1066/2993x100)			35.62%