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 R 4,590,000 R 2,700,000 R 1,890,000 Variable expenses 2,099,700 1,130,000 969,700 Contribution margin 2,490,300 1,570,000 920,300 Traceable fixed expenses: Advertising 785,000 470,000 315,000 Selling and administrative 614,000 380,000 234,000 Depreciation 263,000 132,000 131,000 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 Shoes Handbags Sales R 670,000 R 800,000 R 420,000 Traceable fixed expenses: Advertising R 97,000 R 84,000 R 134,000 Selling and administrative R 47,000 R 52,000 R 60,000 Depreciation R 36,000 R 73,000 R 22,000 Variable expenses as a percentage of sales 65 % 40 % 51 % Analysis shows that R75,000 of the Leather Division’s selling and administrative expenses are common to the product lines. 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: Handbag Markets Domestic Foreign Sales R 350,000 R 70,000 Traceable fixed expenses: Advertising R 25,000 R 109,000 Variable expenses as a percentage of sales 44 % 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. 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. b. Based on the above results, which product line should be chosen? multiple choice Garments Shoes

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 R 4,590,000 R 2,700,000 R 1,890,000 Variable expenses 2,099,700 1,130,000 969,700 Contribution margin 2,490,300 1,570,000 920,300 Traceable fixed expenses: Advertising 785,000 470,000 315,000 Selling and administrative 614,000 380,000 234,000 Depreciation 263,000 132,000 131,000 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 Shoes Handbags Sales R 670,000 R 800,000 R 420,000 Traceable fixed expenses: Advertising R 97,000 R 84,000 R 134,000 Selling and administrative R 47,000 R 52,000 R 60,000 Depreciation R 36,000 R 73,000 R 22,000 Variable expenses as a percentage of sales 65 % 40 % 51 % Analysis shows that R75,000 of the Leather Division’s selling and administrative expenses are common to the product lines. 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: Handbag Markets Domestic Foreign Sales R 350,000 R 70,000 Traceable fixed expenses: Advertising R 25,000 R 109,000 Variable expenses as a percentage of sales 44 % 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. 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. b. Based on the above results, which product line should be chosen? multiple choice Garments Shoes

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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	Divisions
	Total Company	Cloth	Leather
Sales	R	4,590,000		R	2,700,000	R	1,890,000
Variable expenses		2,099,700			1,130,000		969,700
Contribution margin		2,490,300			1,570,000		920,300
Traceable fixed expenses:
Advertising		785,000			470,000		315,000
Selling and administrative		614,000			380,000		234,000
Depreciation		263,000			132,000		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	Shoes	Handbags
Sales	R	670,000		R	800,000		R	420,000
Traceable fixed expenses:
Advertising	R	97,000		R	84,000		R	134,000
Selling and administrative	R	47,000		R	52,000		R	60,000
Depreciation	R	36,000		R	73,000		R	22,000
Variable expenses as a percentage of sales		65	%		40	%		51	%

Analysis shows that R75,000 of the Leather Division’s selling and administrative expenses are common to the product lines.

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:

	Handbag Markets
	Domestic	Foreign
Sales	R	350,000		R	70,000
Traceable fixed expenses:
Advertising	R	25,000		R	109,000
Variable expenses as a percentage of sales		44	%		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.

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.

b. Based on the above results, which product line should be chosen?

multiple choice

Garments
Shoes

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