Reference no: EM133133881

Question - Edward Smith has always independently managed his investment portfolio. After a 25-year career as a finance manager with a large consulting company, Edward retired and on January 1, 2021, opened an investment advisory business incorporated as E&S Financial Services Company. Edward was eager to share his knowledge and investing experience with people in similar positions to himself; that is, those who have recently retired. Also, Edward has discovered there is an unmet need for financial-planning advice for people living in rural areas. Through his parents, Edward has learned that many seniors cannot, or prefer not to, drive to larger cities for financial planning help. Therefore, unlike other financial-planning firms, Edward drives to his sometimes-remote rural clients who can be many kilometers from his home.

In the first year of operations of Edward's company the service was well-liked by clients, and he quickly built his client list to 35 (which is the maximum he plans to serve). However, despite success in attracting clients, his firm is losing several thousands of dollars each month. Prior to offering his services, Edward had investigated client fee structures of several other firms. He discovered that some firms charge clients based on a percentage of the dollar amount invested by the client, some combine a fixed annual fee with a smaller percent of client investment amounts, and others charge an hourly fee only. Edward wanted to keep it simple for his clients and decided to charge only a fixed monthly fee for each client in the first two years. However, because of an operating loss in 2021, Edward is looking for help from you to analyze his financial results and is seeking advice on how to structure (i.e., fixed versus variable) client fees in 2022.

Over the past few years of operations, he has found that some clients require very little time, while others call frequently and demand regular visits and monthly hard copies of statements. (Many older clients do not have Internet or email access and prefer face-to-face meetings.) Therefore, Edward is considering a fee structure not currently being used in the industry; specifically, he would like to charge an annual fixed fee combined with a variable portion based on time spent by him and his assistant on each client account (information he has been carefully tracking). He believes this would better reflect the costs incurred to service his 35 clients.

Because most clients are in rural areas, on average, more than 80% of Edward's time is spent driving to and from the client. The company employs an assistant to help with administrative responsibilities, and this person works 20 hours per week out of Edward's home office. Edward also contracted with another local person to help once a month with the preparation and mailing of monthly investment news and portfolio update. The following are the operating results of E&S Financial Services for the last full year of 2021.

Cost categories:	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
Financial planner salary (Edward)	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000
Assistant salary (extra quarter-end help)	1,800	1,800	1,800	1,800	1,800	1,800	1,800	1,800	1,800	1,800	1,800	1,800
Internet subscription	250	250	250	250	250	250	250	250	250	250	250	250
Bloomberg monthly data feed	150	150	150	150	150	150	150	150	150	150	150	150
Depreciation (office equipment)	150	150	150	150	150	150	150	150	150	150	150	150
Depreciation (car)	550	550	550	550	550	550	550	550	550	550	550	550
Car - roadside assist., Mtce and Gas	200	200	200	200	200	200	200	200	200	200	200	200
Supplies	276	230	225	279	240	222	239	225	326	267	225	204
Insurance	120	120	120	120	120	120	120	120	120	120	120	120
Portfolio information and mailing	38	30	28	23	19	18	14	23	18	30	26	18
Utilities	172	142	146	149	158	117	149	147	135	148	131	172
Total	$10,706	$10,622	$10,619	$10,671	$10,637	$10,577	$10,622	$10,615	$10,299	$10,665	$10,602	$10,629
Hours with clients (includes driving time)	168	162	156	172	142	166	134	157	122	170	167	182

Required -

1. Determine the independent variable and use the 2021 data above to determine which costs are variable (V), mixed (M), or fixed (F).

2. Use the high-low method to separate fixed costs per month and the variable costs.

3. Recommend to Edward a fee structure for next year (2022), assuming his goal is to cover his total costs (including Edward's annual salary). The fee should include a fixed cost per client based on the stated maximum of 35 clients and a variable portion.

4. Analyse the above data, in your opinion do you find any cost data that seems to be impractical? Explain.

5. Edward were to record odometer readings when visiting clients, could this data be used to improve the variable charge rate? Please explain in detail why or why not.