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 650,000 R 800,000 R 370,000 Traceable fixed expenses: Advertising R 70,000 R 86,000 R 102,000 Selling and administrative R 45,000 R 50,000 R 69,000 Depreciation R 34,000 R 71,000 R 24,000 Variable expenses as a percentage of sales 60 % 50 % 55 % Analysis shows that R68,000 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: Handbag Markets Domestic Foreign Sales R 300,000 R 70,000 Traceable fixed expenses: Advertising R 55,000 R 47,000 Variable expenses as a percentage of sales 48 % 85 % 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 R215,000 or sales of the shoes product line by R160,000. The campaign would cost R30,000. 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 Shoes Garments

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 650,000 R 800,000 R 370,000 Traceable fixed expenses: Advertising R 70,000 R 86,000 R 102,000 Selling and administrative R 45,000 R 50,000 R 69,000 Depreciation R 34,000 R 71,000 R 24,000 Variable expenses as a percentage of sales 60 % 50 % 55 % Analysis shows that R68,000 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: Handbag Markets Domestic Foreign Sales R 300,000 R 70,000 Traceable fixed expenses: Advertising R 55,000 R 47,000 Variable expenses as a percentage of sales 48 % 85 % 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 R215,000 or sales of the shoes product line by R160,000. The campaign would cost R30,000. 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 Shoes Garments

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 37P

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100%

	Leather Division Product Lines

	Garments	Shoes	Handbags
Sales	R	650,000		R	800,000		R	370,000
Traceable fixed expenses:
Advertising	R	70,000		R	86,000		R	102,000
Selling and administrative	R	45,000		R	50,000		R	69,000
Depreciation	R	34,000		R	71,000		R	24,000
Variable expenses as a percentage of sales		60	%		50	%		55	%

Analysis shows that R68,000 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:

	Handbag Markets

	Domestic	Foreign
Sales	R	300,000		R	70,000
Traceable fixed expenses:
Advertising	R	55,000		R	47,000
Variable expenses as a percentage of sales		48	%		85	%


	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.

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 R215,000 or sales of the shoes product line by R160,000. The campaign would cost R30,000.

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 Shoes Garments

Divisions
Total
Cloth
R 4,420,000 R 2,600,000 R 1,820,000
1,110,000
Company
Leather
Sales
Variable expenses
2,103,500
993,500
Contribution margin
2,316,500
1,490,000
826,500
Traceable fixed
expenses:
Advertising
Selling and
administrative
708,000
450,000
258,000
592,000
360,000
232,000
Depreciation
259,000
130,000
129,000
Total traceable fixed
1,559,000
940,000
619,000
expenses
Divisional segment
margin
757,500
R 550,000
R 207,500
Common fixed expenses
405,000
Operating income
R 352,500

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:

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