Managerial Accounting Case - Lipton

Topics: Product management, Marketing, Generally Accepted Accounting Principles Pages: 8 (2335 words) Published: February 28, 2012
MBA 520: Managerial Accounting

Performance Measurement at Lipton:
Evaluation and Recommendations

Nick Arens
Chris Lance
Ryan Moore
Rob Sloan

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 Lipton should evaluate product lines and product managers. Contents

Organization Overview2
Current Performance Measurement – Trading Profit2
Issues with Current Performance Measurement3
Proposed Performance Measurement - Economic Profit3
Benefits of Proposed Performance Measurement4
Potential Issues with Proposed Performance Measurement4
Exhibit 15
Analysis and Recommendations5
Educate Product Line Managers6
Capital Charge6
Management Evaluation/Incentive System7
Exhibit 27

Organization Overview
The Company is a subsidiary of Unilever NV (“Unilever”) that offers a variety of products which are classified into three main operating divisions: Beverage, Food, and General Management. Within these divisions are numerous products, and corresponding product lines, ranging from tea to ice cream to salad dressings. Each of these products lines maintains a different marketing strategy based on their market position and growth potential. Historically, Lipton’s strategy has been to invest more capital into the products that are the most profitable while simply maintaining the other profitable product lines that lack growth potential. Unilever’s corporate office does not manage Lipton’s daily operations, only requiring a meeting twice a year to discuss the Company’s consolidated financial results and basic strategic plan. Consistent with this strategic plan, approved by Unilever, the Company has identified certain financial and operating objectives: Maintain sales growth of 10.5% annually;

Achieve a 15% after-tax return on average invested capital; Improve after-tax profit margin to 6%;
Manage current and potential cash needs, including maintaining the Company’s AA bond rating. The stated objectives outlined above are for the consolidated Lipton operations. However, the financial performance of the Company is driven/managed at the individual product line level by product managers. An evaluation of the product line financial performance methodologies currently being implemented was completed. This resulted in the identification of certain opportunities to more closely align the objectives of the broader Company with the individual product line financial performance measures. Current Performance Measurement – Trading Profit

While Lipton’s main corporate measuring tool within the organization is after-tax return on average invested capital (“ATRIC”), Unilever utilizes three different measuring tools: 1. Capital Turnover:Net Sales / Average Gross Capital

Return on Sales:Trading Profit before tax / Net Sales
Return on Capital:Trading Profit after-tax / Average Gross Capital employed Further, the Company’s individual product lines are evaluated based on Trading Profit (Net sales less cost of sales and marketing, selling and administrative costs). Product managers are expected to maximize this figure without having complete control over some of the expenses and elements that make up Trading Profit. Issues with Current Performance Measurement

Don Logan has noticed some issues with the current system and set out to create a better way to specifically evaluate product line performance. First,...
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