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REQUIRED #2

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) for last month is given below: Divisions Tota Company Cloth Leather Sales R3,791,000 R2,230,000 R1,561,000 1,825,050 Variable expenses 983,000 842,050 1,247,000 718,950 1,965,950 Contribution margin Traceable fixed expenses: 323,000 226,000 Advertising 549,000 Administration 495,000 233,000 262,000 137,000 Depreciation 275,000 138,000 1,319,000 694,000 625,000 Total traceable fixed expenses 646,950 R 553,000 R 93,950 Divisional segment margin Common fixed expenses 413,000 R 233,950 Operating income Top management can't understand why the Leather Division has such a low segment margin when its sales are only 30% 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 R560,000 R670,000 R331,000 Sales Traceable fixed expenses R 67,000 R 74,000 R 85,000 Advertising R 53,000 R 66,000 Administration R 58,000 Depreciation R 42,000 R 79,000 R 16,000 Variable expenses as a percentage of sales 70% 40% 55% Analysis shows that R85,000 of the Leather Division's administration expenses are common to the product nes