Rusty Redlow has always independently managed his personal investment portfolio. After a 25-

year career as a chemical engineer with a large chemical company, Rusty retired and on January

1, 2016, opened an investment advisory business incorporated as R&R Financial Planning LLC.

Rusty was eager to share his knowledge and investing experience with people in similar

positions to himself; that is, those who have recently retired. Also, Rusty has discovered there is

an unmet need for financial-planning advice for people living in rural areas. Through his parents,

Rusty 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, Rusty drives to his

sometimes-remote rural clients who can be many kilometres from his home.

The first year of operations of Rusty's company was well liked by clients, and he quickly built

his client list to 35 (which is the maximum he plans to serve). However, despite this success, his

firm lost several thousand dollars last year. Prior to offering his services, Rusty had investigated

client fee structures of several other firms. He discovered that some firms charge clients based on

a percent of the amount of client investment dollars under management, some combine a fixed

annual fee with a smaller percent of client investment amounts, and others charge an hourly fee.

Rusty decided to charge clients a fixed fee for the first two years. Because of an operating loss so

far in 2017, however, Rusty is looking for help to analyze his financial results and is seeking

advice on how much to charge clients in 2017.

In his first year of operations, he found some clients required very little time while others call

frequently and demand visits and monthly hard copies of statements. (Many older clients do not

have Internet or email access and prefer face-to-face meetings.) Therefore, Rusty 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 on each client account

(information he carefully tracked during the first year). He believes this would better reflect the

cost to service the various clients.

Because most clients are in rural areas, on average, more than 90% of Randy's 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 Rusty's home office. Rusty 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 sets out the operating results of

R&R Financial Planning for the past full year of 2016.

Cost categories:

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Financial planner salary (Rusty Redlow)

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

Assistant salary (extra quarter-end

help)

950

950

950

950

950

950

950

950

950

950

950

950

Internet subscripTon

135

135

135

135

135

135

135

135

135

135

135

135

Bloomberg monthly data feed

220

220

220

220

220

220

220

220

220

220

220

220

DepreciaTon (oce equipment)

80

80

80

80

80

80

80

80

80

80

80

80

DepreciaTon (car)

380

380

380

380

380

380

380

380

380

380

380

380

Car - road side assist., Mtce and Gas

308

190

185

210

170

55

59

120

155

214

168

168

Supplies

644

505

500

551

514

440

475

500

500

540

500

480

Insurance

102

102

102

102

102

102

102

102

102

102

102

102

Porolio informaTon and mailing

36

29

14

22

18

8

13

12

14

29

12

15

UTliTes

145

120

110

125

112

92

104

111

119

131

110

116

Total

$7,500

$7,211

$7,176

$7,275

$7,181

$6,962

$7,018

$7,110

$7,155

$7,281

$7,157

$7,146

Hours with clients (includes driving

Tme)

254

148

142

149

109

19

21

55

85

151

105

110

Required:

1.

Determine the independent variable and use the 2016 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 a fee structure for Rusty, assuming his goal is to break even (including Rusty'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.

If Rusty 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?