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, the real, R) for last month is given below: Total Company R 5,040,000 2,224,000 2,816,000 Divisions Cloth Leather R 2,800,000 R2,240,000 1,150,000 1,074,000 1,650,000 1,166,000 Sales Variable expenses Contribution margin Traceable fixed expenses: Advertising Selling and administrative Depreciation Total traceable fixed expenses Divisional segment margin Common fixed expenses Operating income 875,000 636,000 267,000 1,778,000 1,838,000 409,000 R 629,000 490,000 400,000 134,000 1,024,000 R 626,800 R 385,000 236,080 133, 800 754,000 412,000 Top management can't understand why the Leather Division has such a low segment margin when its sales are only 20% 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: Leather Division Product Lines Garments Shoes Handbags Sales R700,000 R900,000 R640,000 Traceable fixed expenses: Advertising R 67,000 R131,000 R187,000 Selling and administrative R 49,000 R 54,000 R 61,000 Depreciation R 38,000 R 75,000 R 20.000 601 305 60 Variable expenses as a percentage of sales Analysis shows that R72,000 of the Leather Division's selling and administrative expenses are common to the product lines. Analysis shows that R72,000 of the Leather Division's selling and administrative 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. Product Line Leather Division Garments Shoes Handbags R R R R 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 OR OR OR Common fixed expenses R 0 - 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: Handbag Markets Domestic Foreign Sales R400,000 R240,000 Traceable fixed expenses: Advertising R 68,000 R119,000 Variable expenses as a percentage of sales 424 904 All of the handbag product line's selling and administrative 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. Sales Market Domestic Handbags Foreign R R 20 0 0 0 Traceable fixed expenses: 0 OR OR Common fixed expenses: OO Total common fixed expenses R 3. Refer to the statement prepared in (1) above. The sales manager wants to run a special promotional campaign on one of the product Mines over the next month. A marketing study indicates that such a campaign would increase sales of the Garments product line by R219,000 or sales of the shoes product line by R164,000. The campaign would cost R34,000. a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income R b. Based on the above results, which product line should be chosen? Garments Shoes
