Please provide explanation.
Severo 5A. of Sao Paulo, Brazil, is organized into two divisions. The company's contribution format segmented income statement (in terms ofthe Brazilian currency, the real, R) for last month is given below: Divisions Total Company Cloth Leather Sales 124,420,000 R2,600,000 R 1,820,000 Variable expenses 2,103,500 1,110,000 993,500 Contribution margin 2,316,500 1,490,000 826,500 Traceable fixed expenses: Advertising 708,000 450,000 258,000 Selling and administrative 592,000 360,000 232,000 Depreciation 259,000 130,000 129,000 Total traceable fixed expenses 1,559,000 940,000 619,000 Divisional segment margin 757,500 R 550,000 R 207,500 Common fixed expenses 405,000 Operating income R 352,500 [ 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 Shoes Handbags Sales R650,000 R800,000 R370,000 Traceable fixed expenses: Advertising R 70,000 R 86,000 R102,000 Selling and administrative R 45,000 R 50,000 R 69,000 Top management can't understand why the Leather Division has such a low segment margin when its sales are only 30% less than ales 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 R650 , 000 R800 , 000 R370 , 000 Traceable fixed expenses: Advertising R 70, 000 R 86, 000 R102 , 000 Selling and administrative R 45, 000 R 50, 000 R 69, 000 Depreciation R 34, 000 R 71, 000 R 24, 000 Variable expenses as a percentage of sales 60% 50% 55% Analysis shows that R68,000 of the Leather Division's selling and administrative expenses are common to the product lines. Required: . 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 0 Common fixed expenses: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 R300 , 000 R70 , 000 Traceable fixed expenses: Advertising R 55 , 000 R47 , 000 Variable expenses as a percentage of sales 48% 85% 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 R 0 0 0 Traceable fixed expenses: OR OR 0 Common fixed expenses:Common fixed expenses: Total common fixed expenses 0 R 0 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 R215,000 or sales of the shoes product line by R160,000. The campaign would cost R30,000. a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income R R b. Based on the above results, which product line should be chosen? O Shoes O Garments
