Question

Segment analysis for a service company

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/advisor services segment serves the retail customer, you and me. These are the brokerage, Internet, and mutual fund services used by individual Investors. The investor services/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/fixed cost
2. Fees paid to exchanges for executing trades   variable cost/fixed cost
3. Depreciation on brokerage offices   variable cost/fixed cost
4. Transaction fees incurred by Schwab mutual funds to purchase and sell shares   variable cost/fixed cost
5. Property taxes on brokerage offices   variable cost/fixed cost
6. Depreciation on brokerage office equipment, such as computers and computer networks   variable cost/fixed cost
7. Advertising  variable cost/fixed 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

Solution: