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 Cloth 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 Total Company R 4,335,000 2,002,750 2,332,250 R 2,550,000 1,100,000 1,450,000 Leather R 1,785,000 902,750 882,250 790,000 440,000 350,000 581,000 350,000 231,000 257,000 129,000 128,000 1,628,000 919,000 709,000 704,250 R 531,000 R 173,250 404,000 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: Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales Leather Division Product Lines Garments R500,000 Shoes R860,000 Handbags R425,000 R 94,000 R126,000 R130,000 R 44,000 R 49,000 R 51,000 R 33,000 R 70,000 R 25,000 65% 40% 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. Traceable fixed expenses: Total traceable fixed expenses Common fixed expenses: Product Line Leather Division Garments Shoes Handbags R R R R 0 0 0 0 0 0 0 OR OR OR 0 0 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 Sales Domestic R340,000 Foreign R 85,000 Traceable fixed expenses: Advertising R 54,000 R 76,000 Variable expenses as a percentage of sales 50% 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. Traceable fixed expenses: Common fixed expenses: Sales Market Handbags Domestic Foreign R R R 0 0 0 OR 0R 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 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. Garments Shoes Increased operating income R R b. Based on the above results, which product line should be chosen? Garments Shoes