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 Leather Sales R5,040,000 22,800,000 R2,240,000 Variable expenses 2,224,000 1,150,000 1,074,000 Contribution margin 2,816,000 1,650,000 1,166,000 Traceable fixed expenses Advertising Selling and administrative Depreciation 875,000 636,000 267,000 490,000 400,000 134,000 385,000 236,000 133,000 Total traceable fixed expenses 1,778,000 1,024,000 754,000 Divisional segment margin 1,038,000 R 626,000 R 412,000 Common fixed expenses 409,000 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 Carments R700,000 Shoes 2900,000 Handbags 2640,000 Sales Traceable fixed expenses Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 67,000 2131,000 2187,000 R 49,000 2 54,000 2 61,000 R 38,000 75,000 B 20,000 608 308 608 Analysis shows that R72,000 of the Leather Division's seng and administrative expenses are common to the product thes. Required 1. Prepare a contribution format segmented income statement for the Leather Division, with segments defined as productes Product Line Leather Division Garments Shoes Handbag Traceable foxed expenses Total traceable foxed expenses BRE Common fixed expenses: 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 ne is sold: Handbag Markets Domestic R400,000 Foreign R240,000 Sales Traceable fixed expenses Advertising Variable expenses as a percentage of sales R 68,000 42 R119,000 90 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 IRR Common foxed 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 R219,000 or sales of the shoes product line by R164,000. The campaign would cost R34.000 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? Garments Shoes
