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25 August, 17:35

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 Advisor Services ServicesRevenues $4,771 $4,597 Income from operations 1,681 1,660 Depreciation 171 154Estimate the contribution margin for each segment, assuming that depreciation represents the majority of fixed costs. Investor Services Advisor Services (in millions) (in millions) Estimated contribution margin $1,681 $1,660 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: $1,660 million. Assume the fixed assets were "sold": $ 1,506 million

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  1. 25 August, 18:04
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    Answer and Explanation:

    a. The estimation of the contribution margin for each segment is shown below:

    (in millions)

    Particulars Investor Advisor Services Services

    Income from

    operations $1,681 $1,660

    Add:

    Depreciation $171 $154

    Contribution

    Margin $1,852 $1,814

    2. Now the estimation of decline in operating income is

    (in millions)

    Particulars Combined services Institutional Services

    Revenues $9,368 $4,771

    Less:

    Variable cost $5,702 $2,919

    ($2,919 + $2,783)

    Contribution

    margin $3,666 $1,852

    Less:

    Fixed cost - $325 - $171

    Net income $3,341 $1,681

    So according to the above calculations, the net operating income is declined by

    = $3,341 - $1,681

    = $1,660 million

    The variable cost is come from

    = Service revenues - income from operations - depreciation expense
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