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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: Divisions Total Company R 4,845,000 2,217,500 Sales Variable expenses Cloth R 2,850,000 1,160,000 Leather R 1,995,000 1,057,500 Contribution margin 2,627,500 1,690,000 937,500 Traceable fixed expenses: Advertising Selling and administrative Depreciation 811,000 647,000 269,000 500,000 410,000 135,000 311,000 237,000 134,000 Total traceable fixed expenses 1,727,000 1,045,000 682,000 Divisional segment margin 900,500 R 645,000 R 255,500 Common fixed expenses 410,000 Operating income R 490,500 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 R750,000 Shoes R980,000 Handbags R345, wee Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 71,000 R 50,000 R 39,800 70% R 76, eee R 55,000 R 76,000 40% R164,888 R 65,000 R 19,000 50% Analysis shows that R67,000 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 OR OR OR 0 Common fixed expenses: R 0 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: Handbag Markets Domestic Foreign Sales R388,888 R45,888 Traceable fixed expenses : Advertising R 69,000 R95,600 variable expenses as a percentage of sales 47% 70% 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 Handbags Domestic Foreign R R 0 Traceable fixed expenses: OR OR Common fixed expenses: 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 lines over the next month. A marketing study indicates that such a campaign would increase sales of the Garments product line by R220,000 or sales of the shoes product line by R165.000. The campaign would cost R35,000. a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income b. Based on the above results, which product line should be chosen? O Garments O Shoes