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 Sales Variable expenses Total Company R 4,590,000 2,099, 700 cloth R 2,700,000 1,130,000 Leather R 1,890,000 969, 700 Contribution margin 2,490,300 1,570,000 920,300 Traceable fixed expenses: Advertising Selling and administrative Depreciation 785,000 614,000 263,000 470,000 380,000 132,000 315,000 234,000 131,000 Total traceable fixed expenses 1,662,000 982,000 680,000 Divisional segment margin 828,300 R 588,000 R 240,300 Common fixed expenses 407,000 Operating income R 421,300 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 R670,000 Shoes R800,000 Handbags R420,000 Sales Traceable fixed expenses : Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 97,000 R 47,000 R 36,000 658 R 84,000 R 52,000 R 73,000 40% R134,000 R 60,000 R 22,000 51% Analysis shows that R75,000 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 Garments Shoes Handbags R RI RI R 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 OR OR OR 0 Common fixed expenses: R 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 R350,000 Foreign R 70,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 25,000 44% R109,000 86% 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. 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 0 0 0 Traceable fixed expenses: ORI 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 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. Garments Shoes Increased operating income b. Based on the above results, which product line should be chosen? O Garments O Shoes