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 2,213,000 2,462,000 Cloth 1,140,000 1,610,000 Leather Sales R 4,675,000 R 2,750,000 R 1,925,000 1,073,000 Variable expenses Contribution margin Traceable fixed expenses: 852,000 Advertising Selling and administrative Depreciation 810,000 625,000 265,000 480,000 390,000 133, 000 330,000 235,000 132,000 Total traceable fixed expenses 1,700,000 1,003,000 697,000 Divisional segment margin 762,000 R 607,000 R 155, 000 Common fixed expenses 408,000 Operating income R 354,000 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 Shoes R680,000 R820,000 R425,000 Garments Handbaga Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation R 66,000 R 48,000 R 37,000 R 85,000 R 53,000 R179,000 R 40,000 R 74,000R 21,000 Variable expenses as a percentage of sales 658 508 528 Analysis shows that R94,000 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 Shoes Handbags 0 0 0 0 Traceable fixed expenses Total traceable fixed expenses 0 O R 0 O R 0 0 Common fixed expenses: 0 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 R340,000 Foreign R 85,000 Sales raceable fixed expenses: Advertising R 30,000 R149,000 Variable expenses as a percentage of sales 45% 80% 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 Handbags Domestic Foreign 0 0 Traceable fixed expenses O R 0 Common fixed expenses: Total common fixed expenses 01 0 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 R218,000 or sales of the shoes product line by R163,000. The campaign would cost R33,000 a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating incomeR b. Based on the above results, which product line should be chosen? Garments O Shoes