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 1,850,500 1,999,500 Divisions Cloth Leather R 2,200,000 R 1,650,000 1,000,000 850,500 1,200,000 799,500 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 591,000 471,000 237,000 1,299,000 700,500 394,000 R306,500 340,000 250,000 119,000 709,000 491,000 251,000 221,000 118,000 590,000 209,500 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 R540,000 R740,000 R370,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 64,000 R 34,000 R 23,000 65% R 81,000 R 39,000 R 60,000 40% R106,000 R 40,000 R 35,000 55% Variable expenses as a percentage of sales 65% 40% 55% Analysis shows that R108,000 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 0 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 Foreign R240,000 R130,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 44,000 42% R 62,000 79% 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 RI R 0 0 0 Traceable fixed expenses: OR OR 0 Common fixed expenses: Total common fixed expenses 0 R 0 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 R204,000 or sales of the shoes product line by R149,000. The campaign would cost R34,000. a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income b. Based on the above results, which product line should be chosen? Garments Shoes