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:

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: Total Company R 3,850,000 1.870.000 1,980,000 Divisions Cloth R 2.200.000 1.050,000 1. 150,000 Leather R 1.650,000 820,000 830,000 Sales Variable expenses Contribution margin Traceable fixed expenses: Advertising Selling and administrative Depreciation Total traceable fixed expenses Divisional segment margin Common fixed expenses Operating income 692.000 526, 000 247,000 1, 465,000 515, 000 399.000 116.000 390,000 300,000 124 000 814,000 336,000 302, 000 226,000 123,000 651,000 179,000 R R R Top management can't understand why the Leather Division has such a low segment margin when its sales are only 25% 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 R 500.000 R 800.000 R 350.000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 59,000 R 39,000 R 28,000 65% R 121,000 R 44.000 R 65,000 40% R 122.000 R 60,000 R 30,000 50% Analysis shows that R83,000 of the Leather Division's selling and administrative expenses are common to the product lines. 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 R209,000 or sales of the shoes product line by R154,000. The campaign would cost R39,000. a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income R b. Based on the above results, which product line should be chosen? O Garments O Shoes