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: Total Company R 4, 675,000 2, 213,000 2, 462,000 Divisions Cloth R 2,750,000 1, 140,000 1,610,000 Leather R 1,925,000 1,073, 000 852,000 Sales Variable expenses Contribution margin Traceable fixed expenses: Advertising Selling and administrative Depreciation Total traceable fixed expenses Divisional segment margin Common fixed expenses Operating income 810, 000 625,000 265,000 1, 700,000 762,000 408,000 354, 000 480,000 390,000 133,000 1,003, 000 607,000 330,000 235,000 132,000 697,000 155,000 R R R 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 R680,000 R820,000 R425,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 66,000 R 48,000 R 37,000 65% R 85,000 R 53,000 R 74,000 50% R179,000 R 40,000 R 21,000 52% Analysis shows that R94,000 of the Leather Division's selling and administrative expenses are common to the product lines. 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 R340,000 R 85,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 30,000 45% R149,000 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. Handbags Sales Market Domestic RI Foreign RI R 0 0 0 Traceable fixed expenses: OR OR 0 Common fixed expenses: Total common fixed expenses 0 R 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. Shoes Garments RI Increased operating income R b. Based on the above results, which product line should be chosen? O Garments O Shoes