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 Company Cloth Leather Sales R 4,500,000 R 2,500,000 R 2,000,000 Variable expenses 2,024,800 1,090,000 934,800 Contribution margin 2,475,200 1,410,000 1,065,200 Traceable fixed expenses: Advertising 821,000 430,000 391,000 Selling and administrative 570,000 340,000 230,000 Depreciation 255,000 128,000 127,000 Total traceable fixed expenses 1,646,000 898,000 748,000 Divisional segment margin 829,200 R 512,000 R 317,200 Common fixed expenses 403,000 Operating income R 426,200 Top management cant 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 Garments Shoes Handbags Sales R 630,000 R 830,000 R 540,000 Traceable fixed expenses: Advertising R 93,000 R 125,000 R 173,000 Selling and administrative R 43,000 R 48,000 R 45,000 Depreciation R 32,000 R 69,000 R 26,000 Variable expenses as a percentage of sales 60 % 30 % 57 % Analysis shows that R94,000 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 Domestic Foreign Sales R 390,000 R 150,000 Traceable fixed expenses: Advertising R 53,000 R 120,000 Variable expenses as a percentage of sales 52 % 70 % 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 R213,000 or sales of the shoes product line by R158,000. The campaign would cost R43,000. 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? Garments Shoes