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 4,410,000 2,070,600 2,339,400 Divisions Cloth R 2,450,000 1,080,000 1,370,000 Leather R 1,960,000 990,600 969,400 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 763,000 559,000 253,000 1,575,000 764,400 402,000 R 362,400 420,000 330,000 127,000 877,000 493,000 343,000 229,000 126,000 698,000 271,400 R R 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: Leather Division Product Lines Garments Shoes Handbags R520,000 R900,000 R540,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 92,000 R 42,000 R 31,000 60% R124,000 R 47,000 R 68,000 40% R127,000 R 75,000 R 27,000 59% Analysis shows that R65,000 of the Leather Division's selling and administrative expenses are common to the product lines. Analysis shows that R65,000 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 R R R R 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 OR OR OR 0 Common fixed expenses: 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: 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 R380,000 R160,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 52,000 51% R 75,000 78% 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 Traceable fixed expenses OR OR 0 Common fixed expenses: H 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 R212,000 or sales of the shoes product line by R157,000. The campaign would cost R42,000. 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 Garments Shoes