Friday, November 9, 2018

Charles Schwab Corporation is one of the more innovative brokerage and financial service companies in the United States

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
Institutional  
Services
Revenues $2,845 $1,403
Income from operations 780 443
Depreciation 93 52


a.  How does a brokerage company like Schwab define the “Investor Services” and “Institutional Services” segments? Use the Internet to develop your answer.

b. Provide a specific example of a variable and fixed cost in the “Investor Services” segment.

c. Estimate the contribution margin for each segment, assuming depreciation represents the majority of fixed costs.

d. If Schwab decided to sell its “Institutional Services” accounts to another company, estimate how much operating income would decline.


Answer:
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 “Institutional Services” segment includes the same services provided for financial institutions, such as banks, mutual fund managers, insurance companies, and pension plan administrators. 

b. Variable costs in the “Investor Services” segment include: 
1. Commissions to brokers 
2. Fees paid to exchanges for executing trades 
3. Transaction fees incurred by Schwab mutual funds to purchase and sell shares 
4. Advertising 

Fixed costs in the “Investor Services” segment include: 

1. Depreciation on brokerage offices 

2. Depreciation on brokerage office equipment, such as computers and computer networks 
3. Property taxes on brokerage offices 

c.  Investor Institutional 
  Services Services 
  (in millions) (in millions) 
 Income from operations………………………………………… $780 $443 
 Plus depreciation…………………………………………………     93     52 
 Estimated contribution margin………………………………… $873 $495 



d. If one assumes that the fixed costs that serve institutional investors (computers, servers, and facilities) would not be sold but would be used by the other sector, then the contribution margin of $495 million would be an estimate of the reduced profitability. If the fixed assets were sold, then the operating income decline would approach $443 million. Since the institutional and retail investors use nearly the same assets, the $495 million answer is probably the better estimate. 


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