Thomas J. Logan Case 33
Case 33
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Thomas J. Lipton, Inc.
In early September 1980, Don Logan was contemplating the poor reception given to the latest changes in product line profit statements and the measures by which product line financial performance was evaluated. As associate director of financial analysis for Thomas J. Lipton, Inc., Mr. Logan had been the main advocate for the changes. Now he was responsible for insuring a smooth transition to the new system. Mr. Logan's involvement in revising the financial statements began in June 1980 when he proposed that product line profit and loss statements (P&Ls) should be adjusted for inflation. In addition, he proposed that certain corporate expenses
be allocated to individual products and that product …show more content…
Logan decided that the time was ripe for revising the method of calculating product line profitability. All of the changes would be instituted simultaneously during 1981 so that the resulting figures would measure what he would call the product line's economic profit. He recommended that four items be added to the 1981 product line P&Ls to arrive at economic profit. Trading profit would be calculated in its present form, but below that changes would be made to reflect the costs of continuing to operate each product line. The specific changes were (1) a deduction to reflect the difference between CRV depreciation and historic cost depreciation; (2) an interest charge for capital employed by a product line; (3) elimination of the new product development charge; and (4) inclusion of previously unallocated corporate OI&D items. Exhibit 33-9 shows the proposed P&L format for 1981. Mr. Logan thought that economic profit would be a measure of the true economic earnings generated by a product. If it was positive, then real wealth would have been created for Lipton and for Unilever. He also thought that economic profit would provide information that would enable senior managers to make better decisions. He noted that the difference between economic profit and trading profit could point out particular long-term problems or advantages associated with particular product lines that were not apparent by just looking at trading profit. He believed that in the long run Lipton would want to focus its financial resources on those product lines that showed a positive economic profit. Mr. Logan also thought that economic profit would induce product managers to make decisions beneficial to the corporation as a whole. Explicitly charging
o
Thomas J. Lipton, Inc.
In early September 1980, Don Logan was contemplating the poor reception given to the latest changes in product line profit statements and the measures by which product line financial performance was evaluated. As associate director of financial analysis for Thomas J. Lipton, Inc., Mr. Logan had been the main advocate for the changes. Now he was responsible for insuring a smooth transition to the new system. Mr. Logan's involvement in revising the financial statements began in June 1980 when he proposed that product line profit and loss statements (P&Ls) should be adjusted for inflation. In addition, he proposed that certain corporate expenses
be allocated to individual products and that product …show more content…
Logan decided that the time was ripe for revising the method of calculating product line profitability. All of the changes would be instituted simultaneously during 1981 so that the resulting figures would measure what he would call the product line's economic profit. He recommended that four items be added to the 1981 product line P&Ls to arrive at economic profit. Trading profit would be calculated in its present form, but below that changes would be made to reflect the costs of continuing to operate each product line. The specific changes were (1) a deduction to reflect the difference between CRV depreciation and historic cost depreciation; (2) an interest charge for capital employed by a product line; (3) elimination of the new product development charge; and (4) inclusion of previously unallocated corporate OI&D items. Exhibit 33-9 shows the proposed P&L format for 1981. Mr. Logan thought that economic profit would be a measure of the true economic earnings generated by a product. If it was positive, then real wealth would have been created for Lipton and for Unilever. He also thought that economic profit would provide information that would enable senior managers to make better decisions. He noted that the difference between economic profit and trading profit could point out particular long-term problems or advantages associated with particular product lines that were not apparent by just looking at trading profit. He believed that in the long run Lipton would want to focus its financial resources on those product lines that showed a positive economic profit. Mr. Logan also thought that economic profit would induce product managers to make decisions beneficial to the corporation as a whole. Explicitly charging