Question

Segment Analysis for a Service Company

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	$2,680		$1,393
Income from operations	1,022		172
Depreciation	101		69

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

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

Solution

Charles Schwab Corp

a. Has already been provided answer.

b. Indicate whether variable costs or fixed costs in the investor services –

1. Commissions to brokers – Variable Costs

2. Fees paid to exchange for executive trades – Variable Cost

3. Depreciation on brokerage office – Fixed cost

4. Transaction fee incurred by schwab mutual funds to purchase and sell shares – Variable Cost

5. Property taxes on brokerage office – Fixed cost

6. Advertising – Variable cost

7. Depreciation on brokerage office equipment – Fixed cost

c. Estimation of the contribution margin for each segment assuming depreciation represents major fixed cost –

	Investor Services (millions)	Advisor Services (millions)
Income from operations	$1,022	$172
Add: depreciation	$101	$69
Contribution margin	$1,123	$241

Note – contribution margin = fixed cost + income from operations

d. Estimation of decline in operating income –

When advisor services is sold, the contribution margin will be lost, the loss is to the extent of $241.

When Schwab sells the Advisor business then the fixed cost has to be absorbed by the Investor Services.

Then the operating income of Investor Services declines to the extent of fixed cost of Advisor Services,.