Lipton Case Review - Mba Managerial Accounting
Executive Summary
Detailed analysis of Lipton’s current Economic Profit model has prompted immediate changes to how profit is recorded on the Product Line level.
Proposed changes to the current Economic Profit include: I. Leave the Working Capital Cost and CRV Depreciation Adjustment in the profit analysis II. Eliminate the Fixed-Asset Charge and OI&D III. Only apply New Product Development charges to new products
Goals of these proposed changes: * Ensure product line managers are focused on improving the value of their product, not just on profit/loss numbers * Allow upper management to analyze product line performance on a level playing field * Provide divisional management with the unbiased authority to allocate fixed asset costs * Enable upper management to make decisions regarding a product line’s value to their division and the overall value of Lipton, and report required performance metrics to Unilever.
Background
Unilever’s Evaluation Criteria include the following metrics: * Capital Turnover- Net Sales / Ave Gross Capital Expenditure * Return on Sales- Profit Before Tax / Net Sales * Return on Capital- After Tax Return on Ave Gross Capital Employed
Their Financial and Operating Objectives include: * Sales growth by 10.5% per year * After tax profit margin to improve by 6% * Achieve 15% after tax return on ave invested capital (ATRIC) * Maintain AA Bond rating
The financial department has recently changed Product Line Profit and Loss (P/L) from “Trading Profit” to “Economic Profit.” The objective of this change was to reflect a more accurate contribution of each product line to the overall corporation. The chart below shows the changes implemented and the subsequent affects to the resulting Economic Profit:
Changes to Trading Profit | Resulting Affects to Proposed Economic Profit | Working Capital Charge | Reduce profit to account for interest cost of capital | CRV Depreciation
Detailed analysis of Lipton’s current Economic Profit model has prompted immediate changes to how profit is recorded on the Product Line level.
Proposed changes to the current Economic Profit include: I. Leave the Working Capital Cost and CRV Depreciation Adjustment in the profit analysis II. Eliminate the Fixed-Asset Charge and OI&D III. Only apply New Product Development charges to new products
Goals of these proposed changes: * Ensure product line managers are focused on improving the value of their product, not just on profit/loss numbers * Allow upper management to analyze product line performance on a level playing field * Provide divisional management with the unbiased authority to allocate fixed asset costs * Enable upper management to make decisions regarding a product line’s value to their division and the overall value of Lipton, and report required performance metrics to Unilever.
Background
Unilever’s Evaluation Criteria include the following metrics: * Capital Turnover- Net Sales / Ave Gross Capital Expenditure * Return on Sales- Profit Before Tax / Net Sales * Return on Capital- After Tax Return on Ave Gross Capital Employed
Their Financial and Operating Objectives include: * Sales growth by 10.5% per year * After tax profit margin to improve by 6% * Achieve 15% after tax return on ave invested capital (ATRIC) * Maintain AA Bond rating
The financial department has recently changed Product Line Profit and Loss (P/L) from “Trading Profit” to “Economic Profit.” The objective of this change was to reflect a more accurate contribution of each product line to the overall corporation. The chart below shows the changes implemented and the subsequent affects to the resulting Economic Profit:
Changes to Trading Profit | Resulting Affects to Proposed Economic Profit | Working Capital Charge | Reduce profit to account for interest cost of capital | CRV Depreciation