I would use the second lounge area as a kids toy room and use a bedroom for your sewing.

My kids don't have toys in their bedrooms, otherwise they would never sleep. We have turned our formal dining area into a kids corner which is separated by a huge, gated divider. It works really well for when people are visiting because the kids can play safely whilst the parents are having a cuppa or whatever. I can also see into the kids corner from the kitchen. It is the perfect set up for us.