Thomas J. Lipton, Inc. wanted to move from a financial reporting system that focused on the company as a whole to one that allowed individual product lines--and their managers--to be measured according to their contribution to profit and their costs. Thomas J. Lipton is a subsidiary of Unilever, a company which also takes inflation and its effects into consideration when looking at the various contributions of its business units. The subsidiary put into place extensive accounting changes more rapidly than it originally planned, and the result was disgruntlement among managers and uncertainty among the plan's developer.
Thomas J. Lipton is a small participant in the highly competitive and mature food processing industry. The company receives most of its revenue from its tea line, but also participates in prepackaged foods and soups, along with other products. Until the accounting changes that were put into place in the early 1980s, the company reported its financial information using actual figures, not taking into account inflation or its effects. The company had seen increases in sales and profits for the previous 28 years, and posted significant increases in sales from 1978 to 1979.
In the mid-1970s, the company switched from return on sales to ATRIC, which measures the return on invested capital and which is calculated by subtracting current liabilities from total assets. This gave Thomas J. Lipton the ability to measure profits against the capital which produced those profits. While this should have been a useful measure to the company, some were dissatisfied that it still focused on the overall performance of the company and did not take into account the contribution of individual product lines.
Meanwhile, Unilever required that Thomas J. Lipton present its financial information after adjusting for inflation, which was running at a much stronger pace in the 1970s than currently. Unilever used capital turnover, retur...