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 Total Company R 5,040,000 2,224,000 Cloth Leather R 2,800,000 R2,240,000 1,150,000 1,074,eee 2 , 816 , e 1,650,000 1,166,000 Sales Variable expenses Contribution margin Traceable fixed expenses: Advertising Selling and administrative Depreciation Total traceable fixed expenses Divisional sement margin 875,000 636,000 267,20 490,000 400,000 134,000 385,000 236,000 133,000 1,778,000 1,024,000 754,000 1,038,000 R 626,000 R 412,000 409,000 Common fixed expenses Operating income R 629,000 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 R700,000 Shoes R900.000 Handbags R640,000 Sales Traceable fixed expenses Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 67,80 49,000 R 38.000 60% R131, eee R 54,000 R 75,eee sex R187.ee R61,eee R 20.ee 605 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 Sales R789,800 R980, eee R640,000 Traceable fixed expenses: Advertising R 67,000 R131,800 R187,000 Selling and administrative R 49,000 R 54,eee R 61,000 Depreciation R 38,eee R 75, eee R20,000 Variable expenses as a percentage of sales 60% 30% 60% Analysis shows that R72,000 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. Leather Division Product Line Shoes Garments Handbags R R R R Traceable fixed expenses Total traceable feed expenses R R R Common food expenses R K R Common foxed 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 Foreign Sales R480,000 R240,000 Traceable fixed expenses: Advertising R 68,000 R119, eee Variable expenses as a percentage of sales 42% 9ex 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. Handbags Sales Market Domestic Foreign R R Traceable fixed expenses R R Common fixed expenses Traceable foxed expenses R R Common fixed expenses Total common forced 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 R219,000 of sales of the shoes product line by R164,000 The campaign would cost R34000 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? Garments Shoes