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Lipton Case Review - Mba Managerial Accounting Essay examples

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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
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CRV Depreciation Adjustment
This adjustment accounts for the difference between the “current replacement value” and the historical depreciation value of assets. The purpose of the CRV adjustment is to assign replacement value to depreciating assets. As a result, the opportunity cost of these assets is deducted from a particular product line’s profit. The challenge associated with this adjustment will be directly related to properly allocating a % of fixed assets to a particular product line. We will address the issue concerning the allocation of fixed assets below (Fixed-Asset Charge). Consequently, this is the same method used by the corporate financial department. Therefore, by including the CRV depreciation, corporate managers will be pleased that product line performance measures are factoring in this opportunity cost. Furthermore, product line managers must be weary of fixed asset costs because of the CRV depreciation adjustment’s negative effect on economic profit.

Fixed-Asset Charge
Fixed Asset charges are difficult to estimate and allocate to a particular product line. Under the old Economic Profit system, many product lines could post losses due to large fixed cost allocations. When losses are associated with a product lines, managers naturally panic. Therefore, we believe that all fixed assets should be evaluated on an Operating Division
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