Reference no: EM132766228
Question - 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 Total Company Cloth Leather
Sales R4,335,000 R2,550,000 R1,785,000
Variable expenses 2,002,750 1,100,000 902,750
Contribution margin 2,332,250 1,450,000 882,250
Traceable fixed expenses: Advertising 790,000 440,000 350,000
Selling and administrative 581,000 350,000 231,000
Depreciation 257,000 129,000 128,000
Total traceable fixed expenses 1,628,000 919,000 709,000
Divisional segment margin 704,250 R531,000 R173,250
Common fixed expenses 404,000
Operating income R300,250
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
Sales R500,000 R860,000 R425,000
Traceable fixed expenses: Advertising R94,000 R126,000 R130,000
Selling and administrative R44,000 R49,000 R51,000
Depreciation R33,000 R70,000 R25,000
Variable expenses as a percentage of sales 65% 40% 55%
Analysis shows that R87,000 of the Leather Division's selling and administrative expenses are common to the product lines.
Required -
1. Prepare 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:
Handbag Markets Domestic Foreign
Sales R340,000 R85,000
Traceable fixed expenses: Advertising R54,000 R76,000
Variable expenses as a percentage of sales 50% 75%
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 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 R214,000 or sales of the shoes product line by R159,000. The campaign would cost R44,000.
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?