Performance Evaluation and Ethics. Pittsburgh-Walsh Company (PWC) is a manufacturing company whose product line consists of lighting fixtures and electronic timing devices. The Lighting Fixtures Division assembles units for the upscale and mid-range markets. The Electronic Timing Devices Division manufactures instrument panels that allow electronic systems to be activated and deactivated at scheduled times for both efficiency and safety purposes. Both divisions use the same manufacturing facilities and share production equipment.

PWC's budget for the year ending December 31,2000, is shown on the next page. This budget was prepared under the following guidelines:

- Variable expenses are directly assigned to the incurring division.

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

- Common fixed expenses are allocated to the divisions on the basis of units produced which bear a close relationship to direct labor. Included in common fixed expenses are costs of the corporate staff, legal expenses, taxes, staff marketing, and advertising.

- The production plan is for 8,000 upscale fixtures, 22,000 mid-range fixtures, and 20,000 electronic timing devices.
PWC established a bonus plan for division management that requires meeting the budget'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 2000 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 capacity to increase production of the remaining two product lines. The marketing staff advised that electronic timing devices could grow by 40 percent with increased direct sales support. Increases above that level and increases in sales of upscale lighting fixtures would require additional advertising expenditures to expand consumer awareness of PWC as an electronics and upscale lighting fixture 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 product 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 preliminary actual data for review and adjustment, as appropriate. These preliminary yearend data, which follow, reflect the revised units of production amounting to 12,000 upscale fixtures, 4,000 mid-range fixtures, and 30,000 electronic timing devices.
The controller of the Lighting Fixtures Division, anticipating a similar bonus plan for 2001, is contemplating deferring some revenues into 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 2001. The corporation would meet its annual plan, and the division would exceed the ten percent incremental bonus plateau in the year 2000 despite the deferred revenues and accrued expenses contemplated.

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Sales... Variable expenses: Budget for the Year Ending December 31, 2000 (Amounts in Thousands) Lighting Fixtures Upscale $1,440 Electronic Timing Mid-range Devises Totals $770 $800 $3,010 Cost of goods sold....... Selling and administrative ... 720 439 320 1,479 170 60 60 290 Contribution margin.......... $ 550 $271 $420 $1,241 Fixed overhead expenses ...... 140 80 80 90 300 Segment margin..... $ 410 $191 $340 $ 941 Common fixed expenses: Overhead....... 48 132 120 300 Selling and administrative ... 11 31 28 70 Net income (loss) $ 351 $ 28 $192 $ 571