Pittsburgh-Walsh Company (PWC) is a manufacturing company whose product line con¬

sists of lighting fixtures and electronic timing devices. The Lighting Fixtures Division a.ssembles units for the upscale and mid-range markets. The Electronic Timing Devices Divi¬

sion manufactures instrument panels that allow electronic systems to be activated and deactivated at scheduled times for both efficiency and safety purposes. Both divisions op¬

erate out of the same manufacturing facilities and share production equipment.

PWC's budget for the year ending December 31, 2001, is shown at the top of the next page and was prepared on a business segment basis under the following guidelines:

a. Variable expenses are directly assigned to the incurring division.

b. Fixed overhead expenses are directly assigned to the incurring division.

c. The production plan is for 8,000 upscale fixtures, 22,000 mid-range fixtures, and 20,000 electronic timing devices. Production equals sales.

PWC established a bonus plan for division management that required meeting the bud¬

get's planned net income by product line, with a bonus increment if the division exceeds the planned product line net income by ten percent or more.

Shortly before the year began, the CEO, Jack Parkow, suffered a heart attack and retired.
After reviewing the 2001 budget, the new CEO, Joe Kelly, decided to close the lighting fixtures mid-range product line by the end of the first quarter and use the available production capac¬
ity to grow the remaining two product lines. The marketing staff advised that electronic tim¬
ing devices could grow by 40 percent with increased direct sales support. Increases above that level and increasing sales of upscale lightmg fixtures would require expanded advertising ex¬
penditures to increase consumer awareness of PWC as an electronics and upscale lighting fix¬
tures company. Kelly approved the increased sales support and advertising expenditures to achieve the revised plan. Kelly advised the divisions that for bonus purposes the original prod¬
uct line net income objectives must be met, but he did allow the Lighting Fixtures Division to combine the net income objectives for both product lines for bonus purposes.
Prior to the close of the fiscal year, the division controllers were furnished with pre¬
liminary actual data for review and adjustment, as appropriate. These preliminary year-end data reflect the revised units of production amounting to 12,000 upscale fixtures, 4,000 mid¬
range fixtures, and 30,000 electronic timing devic'es and are presented below.

The controller of the Lighting Fixtures Division, anticipating a similar bonus plan for 2002, is contemplating deferring some revenues to the next year on the pretext that the sales are not yet final, and accruing in the current year expenditures that will be applicable to the first quarter of 2002. The corporation would meet its annual plan, and the division would exceed the ten percent incremental bonus plateau in the year 2001 despite the deferred rev¬
enues and accrued expenses contemplated.
Required:
1. Outline the benefits that an organization realizes from segment reporting. Evaluate seg¬
ment reporting on a variable cost basis versus an absorption cost basis.
2. Calculate the contribution margin, contribution margin v^olume, and sales mix variances.
3. Explain why the variances occurred.

Transcribed Image Text:

PWC Budget For the Year Ending December 31, 2001 (in thousands) Lighting Fixtures Electronic Upscale Mid-range Timing Devices Total Sales $1,440 $770 $800 $3,010 Variable expenses: Cost of goods sold (720) (439) (320) (1,479) Selling and administrative (170) (60) (60) (290) Contribution margin $ 550 $271 $420 $1,241 Fixed overhead expenses 140 80 80 300 Segment margin $ 410 $191 $340 941