Question

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

	Investor (Retail) Services		Advisor Services
Revenues	$7,321		$2,811
Operating income before taxes	3,176		1,386
Depreciation and amortization	186		120

a. How do you believe Schwab defines the difference between the segments?
The “Investor (Retail) Services” segment serves the retail customer and the “Advisor Services” segment includes services for corporate or pension funds.

b. All of the following would be considered to be variable costs in the “Investor (Retail) Services” segment except:
Depreciation on brokerage offices.

c. Estimate the contribution margin for each segment. Enter your answers in millions (example: 80,000,000 would be entered as "80").

 

	Investor (Retail) Services		Advisor Services
Operating income before taxes	$		$
Plus depreciation and amortization	$		$
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: $fill in the blank 12 million
Assume the fixed assets were “sold”: $fill in the blank 13 million

Answer 1

Requirement 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.

 

Requirement b:

Variable costs

Commissions to brokers	Impacted by trades executed
Fees paid to exchanges for executing trades	Impacted by number of trades executed
Transaction fees incurred by Schwab mutual funds to purchase and sell shares	Impacted by number of transactions
Advertising

 

Fixed costs:

Depreciation on brokerage offices

Property taxes on brokerage offices

Depreciation on brokerage office equipment, such as computers and computer networks

 

Requirement c:

 

	Investor (Retail) Services	Advisor Services
Operating income before taxes	$3,176	$1,386
Plus depreciation and amortization	$186	$120
Estimated contribution margin	$3,362	$1,506

 

Requirement d:

Part 1: Assume the fixed costs that serve the Advisor Services business would not be sold

 

Then the contribution margin of $1,506 million would be an estimate of the reduced profitability

 

Part 2: Assume the fixed assets were “sold”:

 

If the fixed assets were sold, then the operating income decline would be $1,386 million

Variable costs are costs that changes with change in quantity of production of a business whereas fixed costs are do not change with volume of production or sales.