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

________________________________________

Total

Company Cloth Leather

Sales R 4,420,000 R 2,600,000 R 1,820,000

Variable expenses 2,103,500 1,110,000 993,500

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Contribution margin 2,316,500 1,490,000 826,500

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Traceable fixed expenses:

Advertising 708,000 450,000 258,000

Selling and administrative 592,000 360,000 232,000

Depreciation 259,000 130,000 129,000

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Total traceable fixed expenses 1,559,000 940,000 619,000

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Divisional segment margin 757,500 R 550,000 R 207,500

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

Common fixed expenses 405,000

________________________________________ ________________________________________ ________________________________________

Operating income R 352,500

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

________________________________________

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:

Leather Division Product Lines

________________________________________

Garments Shoes Handbags

Sales R 650,000 R 800,000 R 370,000

Traceable fixed expenses:

Advertising R 70,000 R 86,000 R 102,000

Selling and administrative R 45,000 R 50,000 R 69,000

Depreciation R 34,000 R 71,000 R 24,000

Variable expenses as a percentage of sales 60 % 50 % 55 %

________________________________________

Analysis shows that R68,000 of the Leather Division's selling and administrative expenses are common to the product lines.

Required:

1. Prepare 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 available about the markets in which the handbag line is sold:

Handbag Markets

________________________________________

Domestic Foreign

Sales R 300,000 R 70,000

Traceable fixed expenses:

Advertising R 55,000 R 47,000

Variable expenses as a percentage of sales 48 % 85 %

________________________________________

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 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 R215,000 or sales of the shoes product line by R160,000. The campaign would cost R30,000.

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?

multiple choice

Shoes

Garments

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

________________________________________

Total

Company Cloth Leather

Sales R 4,420,000 R 2,600,000 R 1,820,000

Variable expenses 2,103,500 1,110,000 993,500

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Contribution margin 2,316,500 1,490,000 826,500

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Traceable fixed expenses:

Advertising 708,000 450,000 258,000

Selling and administrative 592,000 360,000 232,000

Depreciation 259,000 130,000 129,000

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Total traceable fixed expenses 1,559,000 940,000 619,000

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Divisional segment margin 757,500 R 550,000 R 207,500

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

Common fixed expenses 405,000

________________________________________ ________________________________________ ________________________________________

Operating income R 352,500

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

________________________________________

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:

Leather Division Product Lines

________________________________________

Garments Shoes Handbags

Sales R 650,000 R 800,000 R 370,000

Traceable fixed expenses:

Advertising R 70,000 R 86,000 R 102,000

Selling and administrative R 45,000 R 50,000 R 69,000

Depreciation R 34,000 R 71,000 R 24,000

Variable expenses as a percentage of sales 60 % 50 % 55 %

________________________________________

Analysis shows that R68,000 of the Leather Division's selling and administrative expenses are common to the product lines.

Required:

1. Prepare 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 available about the markets in which the handbag line is sold:

Handbag Markets

________________________________________

Domestic Foreign

Sales R 300,000 R 70,000

Traceable fixed expenses:

Advertising R 55,000 R 47,000

Variable expenses as a percentage of sales 48 % 85 %

________________________________________

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 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 R215,000 or sales of the shoes product line by R160,000. The campaign would cost R30,000.

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?

multiple choice

Shoes

Garments

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

________________________________________

Total

Company Cloth Leather

Sales R 4,420,000 R 2,600,000 R 1,820,000

Variable expenses 2,103,500 1,110,000 993,500

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Contribution margin 2,316,500 1,490,000 826,500

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Traceable fixed expenses:

Advertising 708,000 450,000 258,000

Selling and administrative 592,000 360,000 232,000

Depreciation 259,000 130,000 129,000

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Total traceable fixed expenses 1,559,000 940,000 619,000

________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________

Divisional segment margin 757,500 R 550,000 R 207,500

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

Common fixed expenses 405,000

________________________________________ ________________________________________ ________________________________________

Operating income R 352,500

________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________

________________________________________

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:

Leather Division Product Lines

________________________________________

Garments Shoes Handbags

Sales R 650,000 R 800,000 R 370,000

Traceable fixed expenses:

Advertising R 70,000 R 86,000 R 102,000

Selling and administrative R 45,000 R 50,000 R 69,000

Depreciation R 34,000 R 71,000 R 24,000

Variable expenses as a percentage of sales 60 % 50 % 55 %

________________________________________

Analysis shows that R68,000 of the Leather Division's selling and administrative expenses are common to the product lines.

Required:

1. Prepare 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 available about the markets in which the handbag line is sold:

Handbag Markets

________________________________________

Domestic Foreign

Sales R 300,000 R 70,000

Traceable fixed expenses:

Advertising R 55,000 R 47,000

Variable expenses as a percentage of sales 48 % 85 %

________________________________________

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 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 R215,000 or sales of the shoes product line by R160,000. The campaign would cost R30,000.

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?

multiple choice

Shoes

Garments