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 Company			Cloth			Leather
Sales	R	4,186,000		R	2,300,000		R	1,886,000
Variable expenses		1,874,760			1,020,000			854,760
Contribution margin		2,311,240			1,280,000			1,031,240
Traceable fixed expenses:
Advertising		760,000			360,000			400,000
Selling and administrative		570,000			270,000			300,000
Depreciation		241,000			121,000			120,000
Total traceable fixed expenses		1,571,000			751,000			820,000
Divisional segment margin		740,240		R	529,000		R	211,240
Common fixed expenses		396,000
Operating income	R	344,240

Top management cant understand why the Leather Division has such a low segment margin when its sales are only 18% 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	R	560,000		R	750,000		R	576,000
Traceable fixed expenses:
Advertising	R	86,000		R	118,000		R	196,000
Selling and administrative	R	36,000		R	41,000		R	42,000
Depreciation	R	25,000		R	62,000		R	33,000
Variable expenses as a percentage of sales		60	%		30	%		51	%

Analysis shows that R181,000 of the Leather Divisions 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.

2. Management is surprised by the handbag product lines 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	R	360,000		R	216,000
Traceable fixed expenses:
Advertising	R	46,000		R	150,000
Variable expenses as a percentage of sales		45	%		61	%

All of the handbag product lines 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.

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 R206,000 or sales of the shoes product line by R151,000. The campaign would cost R36,000.

a. Compute the increased operating income for these product lines for the expected increased sales.

b. Based on the above results, which product line should be chosen?

multiple choice

• Garments

• Shoes

Defence Electronics Inc. information appears to be missing, change the row height to well.) Based in Winnipeg, Manitoba, Defence Electronics Inc. (DEI) was founded to provide security systems, facilities controls and related services. DEI established a solid reputation for quality and the business grew thanks to strong relationships with large, long-term customers in Canada and the United States. The Research and Innovation Group (RIG) is the development side of the company. They are considering a new contract that will strain resources for not only RIG, but the entire company. With an upfront cost of $11.0 million, managers understand that the cost of capital will be a key part of maintaining and improving Clearview's competitive edge. You have been asked to calculate the company's weighted average cost of capital (WACC), based on the following information. Over the last five years the annual dividends on the firm's common stock have grown at 6.00 percent per year and this growth is expected to continue indefinitely. A common share dividend of $2.260 per share was recently paid. Common shares trade at $50.000 per share. The company has authorized 291,000 common shares, with 262,000 common shares issued and outstandin estinn Sheet Answer sheet New