n on sales and return on capital as its measures for all of its subsidiaries, which gave it a picture of how each company was performing against a single standard.
In order to adjust for inflation, depreciation was calculated using the current replacement value (CRV) for fixed assets. The net book value of these assets was then state as gross CRV minus accumulated CRV depreciation. Gross capital us the net CRV of fixed assets plus working capital. Although Thomas J. Lipton had implemented the ATRIC calculation, the fact that it did not account for inflation caused problems as the high inflation rate in the United States began to distort the measure. In addition, invested capital was determined by historic costs, which did not reflect the trust cost of replacing fixed assets. Inflated profits and understated assets meant that the true ATRIC was lower than the ATRIC reported by Thomas J. Lipton.
The system which was implemented to correct these problems was based on individual products' "economic profit." This measure would begin with the trading profit currently calculated at Thomas J. Lipton and other American companies. From the trading profit, there would be a deduction to account for the difference between CRV depreciation and historic depreciation. There would be an interest charge for capital that a product line used. The new product development charge would be eliminated, and previously corporate items would be allocated to each product. This economic profit, in theory, would be a measure of the true economic earnings generated by a product.
The difference between trading profit and economic profit was, in some cases, dramatic. For example, in one product line, the trading profit was shown to be $4.5 million, while the economic profit was a loss of $866,000. Although the plan's developer expected there to be some resistance from product managers, he was unprepared for the level of resistance that he actually r...