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: Total Company R 3,995,000 1,955,000 2,040,000 Divisions cloth R 2,350,000 1,030,000 1,320,000 Leather R 1,645,000 925,000 720,000 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 600,000 504,000 243,000 1,347,000 693,000 397,000 R 296,000 370,000 280,000 122,000 772,000 548,000 230,000 224,000 121,000 575,000 145,000 R R 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 R500,000 R770,000 R375,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 57,000 R 37,000 R 26,000 60% R 81,000 R 42,000 R 63,000 50% R 92,000 R 45,000 R 32,000 64% Analysis shows that R100,000 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 Division Garments Shoes Handbags Sales R R R R 0 0 0 0 Variable expenses Contribution margin Traceable fixed expenses: Advertising Selling & administrative Depreciation Total traceable fixed expenses Product line segment margin Common fixed expenses: Divisional segment margin 0 0 0 ola OR 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 Domestic Foreign R200,000 R175,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 47,000 43% R 45,000 88% 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 Foreign R R R 0 0 0 Traceable fixed expenses: OR OR 0 Common fixed expenses: 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 R207,000 or sales of the shoes product line by R152,000. The campaign would cost R37,000. a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income b. Based on the above results, which product line should be chosen? O Shoes O Garments