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 Cloth R3,825,000 R2,250,000 1,889,750 1,010,000 Leather R 1,575,000 879,750 1,935,250 1,240,000 695,250 Sales Variable expenses Contribution margin Traceable fixed expenses : Advertising Selling and administrative Depreciation Total traceable fixed expenses Divisional segment margin 592,000 482,000 239,000 350,000 260,000 120,000 242,000 222,000 119,000 1,313,000 730,000 583,000 622,250 R 510,000 R 112,250 Common fixed expenses Operating income 395,000 R 227,250 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 Shoes Handbags R550,000 R700,000 R325,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 65,000 R 35,000 R 24,000 659 R 82,000 R 40,000 R 61,000 50% R 95,000 R 38,000 R 34,000 53 Analysis shows that R109,000 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 Traceable fixed expenses: Total traceable foxed expenses R R 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 R250,000 R75,000 Traceable fixed expenses: Advertising R 45,000 R50,000 Variable expenses as a percentage of sales 44% 83% 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 R Foreign R Traceable fixed expenses: R R 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 R205,000 or sales of the shoes product line by R150,000. The campaign would cost R35,000. 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? Garments Shoes