Segment Analysis Winston Sylvester Corporation is a brokerage and financial serv
ID: 2535767 • Letter: S
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):
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.
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
Services Institutional
Services Revenues $2,510 $1,553 Income from operations 1,042 182 Depreciation 100 56
Explanation / Answer
Part 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.
Part 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
Part C
Part 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 $238 million would be an estimate of the reduced profitability. If the fixed assets were sold, then the operating income decline would approach $182 million. Because the institutional and retail investors use nearly thesame assets, the $238 million answer is probably the better estimate.
Investor services (in millions) institutional services (in millions) Income from operations 1042 182 Plus depreciation 100 56 Estimated contribution margin 1142 238