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 i Common fixed expenses Operating income Total Company R 5,040,000 2,224,000 2,816,000 Divisions Cloth R 2,800,000 1,150,000 1,650,000 Leather R 2,240,000 1,074,000 1,166,000 875,000 490,000 385,000 636,000 400,000 236,000 267,000 134,000 133,000 1,778,000 1,024,000 754,000 1,038,000 409,000 R 626,000 R 412,000 629,000 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: Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales Leather Division Product Lines Garments R700,000 Shoes R900,000 Handbags R640,000 R 67,000 R131,000 R 49,000 R187,000 R 54,000 R 61,000 R 38,000 R:75,000 R 20,000 60% 30% 60% Analysis shows that R72,000 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 0 0R OR OR 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 Check my work Sales Traceable fixed expenses: Advertising Variable expenses, as a percentage of sales Domestic R400,000 Foreign R240,000 R 68,000 R119,000 42% 90% 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 Total common fixed expenses Handbags Sales Market Domestic Foreign R 0 0R 0R 0 0 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 R219,000 or sales of the shoes product line by R164,000. The campaign would cost R34,000. a. Compute the increased operating income for these product lines for the expected increased sales. Increased operating income Garments Shoes b. Based on the above results, which product line should be chosen? O Garments O Shoes