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 CompanyClothLeatherSalesR4,590,000 R2,700,000 R1,890,000 Variable expenses 2,099,700 1,130,000 969,700 Contribution margin 2,490,300 1,570,000 920,300 Traceable fixed expenses: Advertising 785,000 470,000 315,000 Selling and administrative 614,000 380,000 234,000 Depreciation 263,000 132,000 131,000 Total traceable fixed expenses 1,662,000 982,000 680,000 Divisional segment margin 828,300 R588,000 R240,300 Common fixed expenses 407,000 Operating incomeR421,300

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 GarmentsShoesHandbagsSalesR670,000 R800,000 R420,000 Traceable fixed expenses: AdvertisingR97,000 R84,000 R134,000 Selling and administrativeR47,000 R52,000 R60,000 DepreciationR36,000 R73,000 R22,000 Variable expenses as a percentage of sales 65% 40% 51%

Analysis shows that R75,000 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 DomesticForeignSalesR350,000 R70,000 Traceable fixed expenses: AdvertisingR25,000 R109,000 Variable expenses as a percentage of sales 44% 86%

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 R217,000 or sales of the shoes product line by R162,000. The campaign would cost R32,000.

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

Garments

Shoes