Severo S.A. of Sao Paulo, Brazil, is organized into two divisions. The companys 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	4,080,000		R	2,400,000		R	1,680,000
Variable expenses		1,918,000			1,040,000			878,000
Contribution margin		2,162,000			1,360,000			802,000
Traceable fixed expenses:
Advertising		611,000			380,000			231,000
Selling and administrative		515,000			290,000			225,000
Depreciation		245,000			123,000			122,000
Total traceable fixed expenses		1,371,000			793,000			578,000
Divisional segment margin		791,000		R	567,000		R	224,000
Common fixed expenses		398,000
Operating income	R	393,000

Top management cant 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	580,000		R	780,000		R	320,000
Traceable fixed expenses:
Advertising	R	58,000		R	82,000		R	91,000
Selling and administrative	R	38,000		R	43,000		R	48,000
Depreciation	R	27,000		R	64,000		R	31,000
Variable expenses as a percentage of sales		70	%		40	%		50	%

Analysis shows that R96,000 of the Leather Divisions 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.

2. Management is surprised by the handbag product lines 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	280,000		R	40,000
Traceable fixed expenses:
Advertising	R	48,000		R	43,000
Variable expenses as a percentage of sales		46	%		78	%

All of the 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.

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 R208,000 or sales of the shoes product line by R153,000. The campaign would cost R38,000.

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

• Garments

• Shoes

Product Line Leather Division Garments Shoes Handbags R R R R Traceable fixed expenses Total traceable fixed expenses R R R Common fixed expenses R Sales Market Handbags Domestic Foreign R R R Traceable fixed expenses: R R Common fixed expenses: Total common fixed expenses R Shoes Garments Increased operating income R RI