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 Sales Variable expenses Total Company cloth Leather R3,655,000 R2,150,000 R1,505,000 1,800, 400 990,000 810,400 Contribution margin 1,854,600 1,160,000 694,600 Traceable fixed expenses: Advertising Selling and administrative Depreciation 610,000 460,000 235,000 330,000 240,000 118,000 280,000 220,000 117,000 Total traceable fixed expenses 1,305,000 688,000 617,000 Divisional segment margin 549,600 R 472,000 R 77,600 Common fixed expenses 393,000 Operating income R 156, 600 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 R510,000 Shoes Handbags R650,000 R345,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 63,000 R 33,000 R 22,000 60% R 80,000 R137,000 R 38,000 R 45,000 R 59,000 R 36,000 50% 52% Analysis shows that R104,000 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 Garments Shoes Handbags Division R R R R Traceable fixed expenses: Total traceable fixed expenses R IR R Common fixed expenses: 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 R230,000 Foreign R115,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 43,000 41% R 94,000 74% 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 R RI R Foreign Traceable fixed expenses: RI IR Common fixed expenses: Total common fixed expenses R 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 R203,000 or sales of the shoes product line by R148,000. The campaign would cost R33,000. 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? Shoes Garments