MBA 520: Managerial Accounting

Performance Measurement at Lipton:
Evaluation and Recommendations
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Nick Arens
Chris Lance
Ryan Moore
Rob Sloan

Summary
We at ALMS Consulting Co. have been hired to analyze the way product lines and product managers are being evaluated at the Thomas J. Lipton, Incorporated (“Lipton” or the “Company”) entity. We will review the performance metrics utilized at the corporate level of Lipton, explain the current methodology utilized to evaluate the individual product lines, and then detail the benefits and potential downfalls of the methodology proposed by Don Logan. Finally, we will provide our own recommendations and opinions as to how
Logan created a new methodology referred to as the Economic Profit P&L statement. This new methodology does not change the Trading Profit calculation in any way; however, the Economic Profit adds the following items to the more traditional calculation of Trading Profit:
Modifying the depreciation method to show the difference between accumulated current replacement value (“CRV”) and historic cost depreciation;
Charging an interest rate for the capital that is being used by each product line;
Completely eliminating the New Product Development costs; and
Including the corporate OI&D charges in the individual product lines.
Benefits of Proposed Performance Measurement
The main advantage of using the newly created Economic Profit methodology is the ability to better understand how a product will produce in the long term. It also allows the product managers to make more informed decisions because the transparency in the use of capital expenses and the allocation of certain charges would make them more cognizant of how all of the charges are affecting their individual product line. Products with positive economic profit are ones that should be invested in and products with negative economic profit need to be examined to determine if adjustments should be made to make it more profitable or if they need to be discontinued. This also creates a consistency between how the