Required:

Prepare a contribution format segmented income statement for the Leather Division, with segments defined as product lines.

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: 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 Total Company R 4,500,000 2,024,800 2,475,200 Sales Traceable fixed expenses: 821,000 570,000 255,000 1,646,000 829, 200 403,000 R 426,200 Leather Divisions Cloth 2,500,000 R 2,000,000 1,098,000 1,410,000 Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 430,000 340,000 128,000 898,000 R 512,000 R 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: 934,800 1,065,200 Garments R630,000 391,000 230,000 127,000 748,000 317,200 Leather Division Product Lines Handbags R540,000 R 93,000 R 43,000 R 32,000 60% Shoes R830,000 R125,000 R 48,000 R 69,000 30% R173,000 R 45,000 R 26,000 57% Analysis shows that R94,000 of the Leather Division's selling and administrative expenses are common to the product lines.