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

Severo SA of Sao Paulo, Brazil, is organized into two divisions. The company's contribution format segmented income statement in terms of the Brazian currency, the real, Rifor last month is given below Dyson Total company 4,186,00 cloth 2,000,000 1,020,000 Leather 1,800,000 154,760 1,631,340 Sales variable expenses Contribution angin Tractable fixed expenses Advertising Selling and ministrative Depreciation Total tracted expenses Divisor 700,00 570,000 241,000 Do, 000 270,00 121, 40,00 300,000 120,00 120,000 1,571,00 740,34 # $20,000 390.00 Como xed expenses Operating con 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 Diston Product Line Garnets Shoes wanda Sales Traceable fixed Advertising 00,00 118,00 110,000 Selling and dinistrative 30.000 41,600 3.000 Depreciation 15,00 #61, + 1,000 515 Variable expenses percentage of sales Analysis shows that R181,000 of the Leather Division's selling and administrative expenses are common to the product lines Analysis shows that R181000 of the Leather Division's seling and administrative expenses are common to the producties 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 R RI R 0 0 0 Traceable fixed expenses Total traceable foed expenses 0 0 0 OR 0 OR OR 0 Common faced expenses 0 2 Management is surprised by the handbag product me's poor showing and would like to have the producte segmented by market. The following information is available out the markets in which the handbag ne is sold 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 Domestic Font Sales Traceable fixed expenses Advertising variable expenses percentage of sales 150,000 All of the handbag product line's seling 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 iine with segments defined as markets Handbags Sales Market Domestic R Foreign R R 0 0 0 Traceable fixed expenses OR OR 0 Common foxed 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 R206.000 or sales of the shoes product line by R151000. The campaign would cost R36.000 o. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income RE b. Based on the above results, which product line should be chosen? Garments Shoes Sever SA of a Paulo Braganded into two che company contribution tomatened income statement one of the racercy the TO OW Total vari 10. W. Athe . Ne Cutti .. L. 1.1, vertising MW . . 1, 1.11 . . 11. Direction Total se fixe .. in sentin M 211, con un coating Inco 1. 144,140 Top management can't understand why the Leater Division has such a low segment margin wens sales are only 18% less thanses in the Clom Division As one step in solating the problem management les directed that the Leather Division be further segmented into product lines. The following information is available on the product lines the Leather Division DU Literbo Recine Gets Shoes . N. 16, 13.00 41.00 4,00 25,000 . 3. wa Trachten certising and instruit Depreciation Ver expects of sales Analysis shows that R181000 of the Leather Division selling and administrative expenses are common to the product ines