Severo S.A. of Sao Paulo, Brazil, is organized into two divisions. The company's contribution format segmented income statement (in terms of the Brazilian currency Real) for last month is given below:

Top management can't understand why the Leather Division has such a low segment margin when its sales are only 25% less than sales in the Cloth Division. As one step in isolating the problem, management has directed that the Leather Division be further segmented into product lines. The following information is available on the product lines in the Leather Division:

Analysis shows that R110, 000 of the Leather Division's administration expenses are common to the product lines.
Required:
1. Prepare a contribution format segmented income statement for the Leather Division with segments defined as product lines.
2. Management is surprised by the handbag product line's poor showing and would like to have the product line segmented by market. The following information is available about the markets in which the handbag line is sold:

All of the handbag product line's administration expenses and depreciation are common to the markets in which the product is sold. Prepare a contribution format segmented income statement for the handbag product line with segments defined as markets.
3. Refer to the statement prepared in (1) above. The sales manager wants to run a special promotional campaign on one of the product lines over the next month. A marketing study indicates that such a campaign would increase sales of the garment product line by R200,000 or sales of the shoes product line by R145,000. The campaign would cost R30,000. Show computations to determine which product line should bechosen.

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Divisions Total Company Cloth Leather Sales Variable expenses Contribution margin Traceable fixed expenses: R3,500,000 R2,000,000 R1,500,000 761,000 739,000 1.721,000 960,000 1,779,000 1,040,000 612,000 427,000 229,000 1.268,000 312,000 217,000 114,000 643,000 511,000 R 415,000 R 96,000 300,000 210,000 115,000 625,000 Administration..._.__-..- Total traceable fixed expenses . Divisional segment margin Common fixed expenses 390,000 Net operating income R 121,000 Leather Division Product Lines Garments Shoes Handbags Sales Traceable fixed expenses: R500,000 R700,000 R300,000 Advertising. Depreciation . of sales.. R80,000 R112.000 R120,000 Administration*_.__R30,000 R35,000 R42,000 R25,000 R56,000 R33,000 . Variable expenses as a percentage 65% 40% 52% Handbag Markets Domestic Foreign Sales ..._....R200,000 R100,000 R40,000 R80,000 70% Traceable fixed expenses: Advertising Variable expenses as a percentage of sales. 43%