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: 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 Sales Traceable fixed expenses: Total Company R 4,410,000 2,070,600 2,339,400 Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 763,000 559,000 253,000 1,575,000 764,400 402,000 362,400 Divisions Cloth Leather R 2,450,000 R 1,960,000 1,080,000 1,370,000 420,000 330,000 127,000 877,000 R 493,000 R Top management can't understand why the Leather Division has such a low segment margin when its sales are only 20% 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: Garments R520,000 990,600 969,400 Leather Division Product Lines R 92,000 R 42,000 R 31,000 343,000 229,000 126,000 698,000 271,400 60% Shoes R900,000 R124,000 R 47,000 R 68,000 40% Handbags R540,000 R127,000 R 75,000 R 27,000 59%

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 reat, R) for last month is given below: Top management can't understand why the Leather Division has such a low segment margin when its sales are only 20% 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: Analysis shows that R65,000 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. 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 avallable about the markets in which the handbag line is sold: 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. 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 R212,000 or sales of the shoes product line by R157,000. The campaign would cost R42,000. 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? Garments Shoes