STRATEGICBUSINESSUNITINDICES ANDRATIOS
Indices (Base Year = 100) Cost and Earnings (per $ Sales)
Industry throughput (units) Cost of goods sold
Business unit’s product throughput (units) Research and development
Business units’s sales (dollars) General administration
Profit after taxes Other income and expenses
Net assets Profit before taxes
Profit after taxes
Return on net assetsInvestment (per $ Sales) Funds Generation and Deployment
Receivables Operating cash flow (per $ sales)
Inventories Change in assets (per $ sales)
Current liabilities
Working capital and other assets Percent internal deployment (change in
Total net assets assets ÷ operating funds flow)This is a historical cost-accounting-oriented analysis subject to the deficiencies in
dealing with inflation mentioned at the beginning of this chapter. The goal of the
business unit should be to earn an appropriate realrate of return on assets. Conse-
quently, the inflation generated holding gain, or loss, should be eliminated from prof-
its, and the asset base used as a divisor in calculating the return on assets should also
be adjusted for inflation. In addition to inflation adjusted rates of return, the strategic
20.5 MANAGERIAL IMPLICATIONS OF INFLATION 20 • 5Consumer Consumer Cumulative Loss
Price Index Price Index Purchasing of Purchasing
Period 1995 = 100a 1995 = 100b Powerc Powerd Inflation %e
1985 70.6 100.0 1.00
1986 71.9 101.8 0.98 –0.02 1.8
1987 74.6 105.7 0.95 –0.05 3.8
1988 77.6 109.9 0.91 –0.09 4.0
1989 81.4 115.3 0.87 –0.13 4.9
1990 85.7 121.4 0.82 –0.18 5.3
1991 89.4 126.6 0.79 –0.21 4.3
1992 92.1 130.5 0.77 –0.23 3.0
1993 94.8 134.3 0.74 –0.26 2.9
1994 97.3 137.8 0.73 –0.27 2.6
1995 100.0 141.6 0.71 –0.29 2.8
1996 102.9 145.8 0.69 –0.31 2.9
1997 105.3 149.2 0.67 –0.33 2.3
1998 107.0 151.6 0.66 –0.34 1.6
1999 109.3 154.8 0.65 –0.35 2.1
2000 112.9 159.9 0.63 –0.37 3.3aConsumer Price Index 1995 = 100
bConverted Index 1985 = 100
cPurchasing power in terms of 1985 dollars. (Reciprocal of column 2)
dCumulative loss of purchasing power (1 – column 3)
eInflation per year change from one year’s index in column 1 to the next year’s index.
Exhibit 20.2. Loss of Purchasing Power in United States Dollars (Index 1995 = 100).
Source:International Financial Statistics: International Monetary Fund.