Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 R 4,335,000 2,002,750 Cloth R 2,550,000 1,100,000 Leather R 1,785,000 902,750 Contribution margin 2,332,250 1,450,000 882,250 Traceable fixed expenses: Advertising Selling and administrative Depreciation 790,000 581,000 257,000 440,000 350,000 129,000 350,000 231,000 128,000 Total traceable fixed expenses 1,628,000 919,000 709,000 Divisional segment margin 704,250 R 531,000 R 173,250 Common fixed expenses 404,000 Operating income R 300,250 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 R500,000 Shoes R860,000 Handbags R425,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 94,000 R 44,000 R 33,000 65% R126,000 R 49,000 R 70,000 40% R130,000 R 51,000 R 25,000 55% Analysis shows that R87,000 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 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 OR OR OR 0 Common fixed expenses: R 0 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 R340,000 Foreign R85,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 54,000 50% R76,000 75% 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 Handbags Domestic Foreign R R R 0 0 0 Traceable fixed expenses: OR OR 0 Common fixed expenses: Total common fixed expenses 0 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 R214,000 or sales of the shoes product line by R159,000. The campaign would cost R44,000. a. Compute the increased operating income for these product lines for the expected increased sales. Shoes Garments Increased operating income R R b. Based on the above results, which product line should be chosen? Garments Shoes
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started