Edward Smith has always independently managed his personal investment portfolio. After a 25- year career as a finance manager with a large consulting company, Edward retired and on January 1, 2020, 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 there are many seniors who 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 kilometres from his home.

The first year of operations of Edwards 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 2020, Edward is looking for help from you to analyze his financial results and is seeking advice on how 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 Edwards time is spent driving to and from the client. The firm employs an assistant to help with administrative responsibilities, and this person works 20 hours per week out of Edwards home office. Edward also contracted with another local person to help once a month with the preparation and mailing of a monthly investment news and portfolio update. The following is the operating results of E&S Financial Services for the past full year of 2020.

Cost categories: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Financial planner salary (Edward) Assistant salary (extra quarter-end help)

$7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000

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 Bloomberg monthly data feed Depreciation (office equipment) Depreciation (car) Car - road side assist., Mtce and Gas Supplies Insurance Portfolio information and mailing Utilities

150 150 150

150 150 150

550 550 550

200 200 200

276 230 225

120 120 120

150 150 150

150 150 150

550 550 550

200 200 200

279 240 222

120 120 120

150 150 150

150 150 150

550 550 550

200 200 200

239 225 326

120 120 120

250 150 150 150 150 150 150 550 550 550 200 200 200

267 225 204 120 120 120

250 250 250 250 250 250 250 250 250 250 250

38 30 28

23 19 18

14 23 18

30 26 18 148 131 172 Total $10,706 $10,622 $10,619 $10,671 $10,637 $10,577 $10,622 $10,615 $10,699 $10,665 $10,602 $10,614

172 142 146

149 158 117

149 147 135

Hours with clients 256 162 156 172 142 66 34 57 127 170 167 182 (includes driving time)

Required:

1. Determine the independent variable and use the 2020 data above to determine which costs are variable (V), mixed (M), or fixed (F).

2. Use the highlow 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 Edwards annual salary). The fee should include a fixed cost per client

   based on the stated maximum of 30 clients and a variable portion.

4. If Edward were to record odometer readings when visiting clients, could this data be used to

   improve the variable charge rate? Would this change the classification of any of the cost categories?