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:

Top management can€™t understand why the Leather Division has such a low segment margin when its sales are only 25% 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:

Analysis shows that R110,000 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.
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:

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.
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 R200,000 or sales of the Shoes product line by R145,000. The campaign would cost R30,000. Show computations to determine which product line should be chosen.

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Division Total Cloth Leather Company Sales .. Variable expenses.. Contribution margin.. Traceable fixed expenses: Advertising.. Selling and administrative. Depreciation.. Total traceable fixed expenses... Divisional segment margin.. Common fixed expenses R3,500,000 R2,000,000 RI,500,000 1,721000 1,779,000 960,000 761,000 1040,000 739,000 612,000 427,000 229,000 300,000 210,000 115,000 312,000 217,000 114,000 625,000 R 415,000 1,268,000 511,000 390,000 643,000 R 96,000 Operating income... R 121,000