Severo SA. 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 3,675,666 R 2,166,666 R 1,575,666 Variable expenses 1,745,566 986,666 765,566 Contribution margin 1,929,566 1,126,666 869,566 Traceable fixed expenses: Advertising 634,666 326,666 314,666 Selling and administrative 449,666 236,666 219,666 Depreciation 233,666 117,666 116,666 Total traceable fixed expenses 1,316,666 667,666 649,666 Divisional segment margin 613,566 R 453,666 R 166,566 Common fixed expenses 392,666 Operating income R 221,566 Top management can't understand why the Leather Division has such a low segment margin when its sales are only 25% 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 R546,666 R766,666 R275,666 Traceable fixed expenses: Advertising R 82,666 R114,666 R118,666 Selling and administrative R 32,666 R 37,666 R 42,666 Depreciation R 21,666 R 58,666 R 37,666 Variable expenses as a percentage of sales 66% 46% 56% Analysis shows that R108,000 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. Total traceable xed 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 Foreign Sales R226,609 R 55,880 Traceable fixed expenses: Advertising R 42,960 R 76,060 Variable expenses as a percentage of sales 42% 82% All ofthe handbag product lines 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 Traceable fixed expenses: R R Common fixed ex 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 R202,000 or sales of the shoes product line by R147,000. The campaign would cost R32,000. 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? O Garments O Shoes