Severo S.A. of Sao Paulo, Brazil, is organized into two divisions. The companys contribution format segmented income statement (in terms of the Brazilian currency, the real, R) for last month is given below:

Divisions Total CompanyClothLeatherSalesR3,655,000 R2,150,000 R1,505,000 Variable expenses 1,800,400 990,000 810,400 Contribution margin 1,854,600 1,160,000 694,600 Traceable fixed expenses: Advertising 610,000 330,000 280,000 Selling and administrative 460,000 240,000 220,000 Depreciation 235,000 118,000 117,000 Total traceable fixed expenses 1,305,000 688,000 617,000 Divisional segment margin 549,600 R472,000 R77,600 Common fixed expenses 393,000 Operating incomeR156,600

Top management cant 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 GarmentsShoesHandbagsSalesR510,000 R650,000 R345,000 Traceable fixed expenses: AdvertisingR63,000 R80,000 R137,000 Selling and administrativeR33,000 R38,000 R45,000 DepreciationR22,000 R59,000 R36,000 Variable expenses as a percentage of sales 60% 50% 52%

Analysis shows that R104,000 of the Leather Divisions selling and administrative expenses are common to the product lines.