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 R4,186,000 1,874,760 Sales Variable expenses cloth R 2,300,000 1,020,000 Leather R1,886,000 8 54,760 Contribution margin 2,311,240 1,280,000 1,031,240 Traceable fixed expenses: Advertising Selling and administrative Depreciation 760,000 570,000 241,000 360,000 270,000 121,000 400,000 300,000 120,000 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 can't 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 R560,000 Shoes R750,000 Handbags R576,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 86,000 R 36,000 R 25,000 60% R118,000 R 41,000 R 62,000 30% 000 R196,000 R 42,000 R 33,000 51% Analysis shows that R181,000 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 Traceable fixed expenses: Total traceable fixed expenses RRR Common fixed expenses: enses: 1 R 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 R360,000 Foreign R216,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R46,000 45% R150,000 61% 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 Domestic Handbags Foreign Traceable fixed expenses: Common fixed expenses: Total common fixed expenses 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. Shoes Garments R Increased operating income R b. Based on the above results, which product line should be chosen? O Garments O Shoes