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	3,995,000		R	2,350,000		R	1,645,000
Variable expenses		1,955,000			1,030,000			925,000
Contribution margin		2,040,000			1,320,000			720,000
Traceable fixed expenses:
Advertising		600,000			370,000			230,000
Selling and administrative		504,000			280,000			224,000
Depreciation		243,000			122,000			121,000
Total traceable fixed expenses		1,347,000			772,000			575,000
Divisional segment margin		693,000		R	548,000		R	145,000
Common fixed expenses		397,000
Operating income	R	296,000

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	500,000		R	770,000		R	375,000
Traceable fixed expenses:
Advertising	R	57,000		R	81,000		R	92,000
Selling and administrative	R	37,000		R	42,000		R	45,000
Depreciation	R	26,000		R	63,000		R	32,000
Variable expenses as a percentage of sales		60	%		50	%		64	%

Analysis shows that R100,000 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	200,000		R	175,000
Traceable fixed expenses:
Advertising	R	47,000		R	45,000
Variable expenses as a percentage of sales		43	%		88	%

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 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.

b. Based on the above results, which product line should be chosen?

multiple choice

• Shoes

• Garments

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 R 3,995,000 1,955,000 Cloth R 2,350,000 1,030,000 Leather R1,645,000 925,000 Contribution margin 2,040,000 1,320,000 720,000 Traceable fixed expenses : Advertising Selling and administrative Depreciation 600,000 504,000 243,000 370,000 280,000 122,000 230,000 224,000 121,000 Total traceable fixed expenses 1,347,000 772,000 575,000 Divisional segment margin 693,000 R 548,000 R 145,000 Common fixed expenses 397,000 Operating income R 296,000 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 R500,000 Shoes R770,000 Handbags 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% R81,000 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: ng lor LUNDI 1 Savea Variable expenses as a percentage of sales 60% 50% 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 R R Traceable fixed expenses: rr Total traceable fixed expenses R Common fixed expenses: R 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 R200,000 Foreign R175,000 Sales Traceable fixed expenses : Advertising Variable expenses as a percentage of sales R 47,000 438 R 45,000 888 y For Loni 1 Savea Domestic R200,000 Foreign R175,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 47,000 438 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 Domestic Handbags Foreign Traceable fixed expenses R IR Common fixed expenses: Total common fixed expenses 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 R R ny Tor Luni 1 Savea Handbags Domestic Foreign Traceable fixed expenses: R R 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 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 RO Increased operating income R b. Based on the above results, which product line should be chosen? O Shoes O Garments