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 Sales Variable expenses Total Company R4,080,000 2,033,000 cloth R2,400,000 1,070,000 Leather R 1,680,000 963,000 Contribution margin 2,047,000 1,330,000 717,000 Traceable fixed expenses: Advertising Selling and administrative Depreciation 650,000 548,000 261,000 410,000 320,000 126,000 240,000 228,000 135,000 Total traceable fixed expenses 1,459,000 856,000 603,000 Divisional segment margin 588,000 R 474,000 R 114,000 Common fixed expenses 401,000 Operating income R 187,000 Top management can't 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 Garments R510,000 Shoes R750,000 Handbags R420,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R61,000 R 41,000 R 30,000 70% R 84,000 R46,000 R 67,000 50% R95,000 R 70,000 R38,000 55% Analysis shows that R71,000 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 R R R R Traceable fixed expenses: Total traceable fixed expenses R R R Common fixed expenses: 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 R300,000 Foreign R120,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 51,000 45% R 44,000 80% 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 RI R R Traceable fixed expenses: R R Common fixed expenses: Total common fixed expenses R 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 R211,000 or sales of the shoes product line by R156,000. The campaign would cost R41,000. a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income R RE b. Based on the above results, which product line should be chosen? Garments Shoes