Question

Segment Analysis Winston Sylvester Corporation is a brokerage and financial service company. The company recently provided information about its major business segments as follows (in millions): Investor Services Institutional Services Revenues $2,440 $1,573 Income from operations 1,044 172 Depreciation 90 50 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”segment. 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 depreciation represents the majority of fixed costs. Investor Services (in millions) Institutional Services (in millions) Estimated contribution margin $ $ d. If Schwab decided to sell its “Institutional Services” accounts to another company, estimate how much operating income would decline under the following assumptions. Assume the fixed costs that serve institutional would not be sold but would be used by the other sector: $ million Assume the fixed assets were “sold”: $ million

This is as given there is no other information to give.

Answer 1

(a) As per my understanding, this part is not a question. It is a continuation of the information provided to understand the company's structure. Please leave a comment if this part is also a question. I will answer it afterwards then.

(b) For the "ïnvestor Services" segment, the costs can be classified as follows:

1. Commission 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.-  Fixed Cost

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

(c) Contribution margin for each segment:

1. Investor Services (in millions) = $1,044 - $90 = $954

2. Institutional Services (in millions) = $172 - $50 = $122

(d) (1) Fixed costs that serve institutional would not be sold but would be used by the other sector: If this is the case, then the operating income will decline by:

Investor Services (in millions) = $ 90

Institutional Services (in millions) = $ 50

(2) Fixed assets were “sold”: If this is the case, then the operating income will increase by:

Investor Services (in millions) = $ 90

Institutional Services (in millions) = $ 50