CHAPTER ONE
INTRODUCTION
1.1
BACK GROUND OF THE STUDY
In modern
economies, prices are
generally expressed in units of
some form of currency. Although, prices could
be quoted as quantities of other goods and services (BARTER SYSTEM). Prices are
sometimes quoted in terms of vouchers such as trading stamps. Price sometimes
refers to the quantity of payment requested by a seller of goods or services
rather than the actual payment amount.
One of the most crucial
operating decisions management must make is establishing a setting price for
its products but this is quiet unfortunately that many firms are still
mismanaging pricing causing lots of money and anticipated profit to be
unexplored and wasted.
In many financial
transactions, it is customary to quote prices in other ways. The requested
amount is sometimes called the asking or selling price, while actual payment
may be called the transaction or traded price.
However in explaining the
importance of pricing, Egbunike (2007:83) sustained that setting the price for
an organizations
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product or service is one
of the most difficult, due to some number of variety of factors that must be
considered. The primary decision arises in virtually all types of organization,
just to mention but a few of them such as manufacturers set prices for their products,
they manufacture, merchandising companies set prices for their goods, service
firms set prices for such services as insurance policies, bank loans etc.
A company’s survival and
profitability depends upon its pricing decisions, thus price is the only
element in the marketing mix that produce s revenue and thus ensures profit
ability (kotler and keller 2006:475) Price adopted by firms must be able to
cover all cost in the long run as well as to leave a profit margin to reward
management.
The Price of a Product has
a direct relationship with many operations of the firm’s activities. A price
decision will affect demand and this in turn affects the revenue generated by
the firm. Similarly, a firm which makes profit has the propensity of attracting
more new capital. This shows that the public has confidence in the ability of
the firm to yield return to them. So, the performance of management is usually
measured by the amount
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of revenue it generates to
satisfy the share holders of the organization.
The actual process of
profit planning involves looking at several key factors relevant to operational
expenses. Putting together effective profit plans requires looking at such
expenses as labour, raw materials, facilities maintenance and upkeep and the
cost of sales and marketing efforts.
It is evident that
management has a big responsibility before them in setting and adopting the
most advantageous pricing policy and the most effective profit plan for their
firms, since prices are not set arbitrarily therefore management must focus on
all the important factors in setting its price. Thus, it has become imperative
to investigate the effectiveness of pricing policy and profit planning in
Nigerian organizations.
In the course of this
study, two companies would be examined: Vintage Nigeria plc, ijanikin Lagos,
manufacturers of vintage beauty products and cosmetics (e.g. body creams,
relaxers, shampoos, etc) was established in the year 1992, and also, Ojukwu pen
farms, producers of poultry proceeds (eggs and chickens) and farm proceeds and
has been in existence since 1987.
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Hilton (1991:201) observed that both the
market forces of demand and supply and the cost of production have a
Significant bearing on determining prices. Equally he explained that there are
other variables that influence pricing decisions according to him, this
includes: Manufacturer’s pricing objective, economic situation, level of
competition, and availability of close substitute.
a.
For pricing to be effective, firms must
incorporate all these factors in selecting the most advantageous price for its
product. At times, firms are not in the habit of considering these factors and
this has led to the shutting down of many factories, downsizing of workforce
and in most cases, winding up of firm’s (Hilton, 1991:201).
b.
Profit plan are made in form of budget and
they help firms to forecast the level of profit, cost and revenue, they intend
to generate in order to gain competitive advantage. Unfortunately many firms
still do not prepare these plans, thus, this has led firms undertaking
unplanned ventures resulting in escalation and inability of firms to foresee
shortage in resources or finance or personnel needed in the future operation of
the firm. Where no
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plans exist, there will be no basis for firm to compare
or evaluate their performance.
c. Based on the foregoing, the problem of this
study is in three
(3) folds.
1 The failure of some firms to incorporate factors
such as economic situation, level of competition, availability of close
substitute, among others in their pricing decisions, may have resulted to the
minding up of several small scale manufacturing firm (SSMF) in Nigeria.
2.
It has been shown in accounting literatures
that profit planning is a potential tool for achieving profit objectives and
efficiency. Which small scale manufacturing firms seems to ignore the use of
profit planning (or budget) in their operations. This has led to far reaching
problem such as huge unforeseen operating cost as well as shortages in good
financial and human resources.
3. Most
importantly, the problem that stringated this study is the knowledge gap, that
is, it looks as if small scale manufacturing firms are not aware that pricing
policy and profit planning impact positively on profit performance.
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This research is
aimed at achieving the following objectives.
(i)
To
determine if pricing decision (s) can make an impact on
a firm’s profit and
efficiency.
(ii) To investigate if profit planning (or
budgeting) can result in
cost reduction and
increased profit performance.
1.4 RESEARCH QUESTIONS
1. Does
pricing decision(s) make an impact on a firm’s profit and efficiency?
2. Does
profit planning (or budgeting) help in cost reduction and increased profit
performance?
1.5
FORMULATION OF HYPOTHESES.
To
achieve the objective of the study, the following hypotheses are formulated.
HYPOTHESIS ONE
Ho – Pricing Policy of a firm has no influence on the
degree to which a firm can achieve optimum profitability.
Hi – Pricing Policy of a firm has influence on the
degree to which a firm can achieve optimum Profitability.
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Ho – Effective profit planning has no effect on the
profit performance of a firm.
Hi- Effective profit
planning has a major effect on the profit performance of a firm.
1.6
SCOPE OF THE STUDY
Since no single research
can validly cover all areas of the topic the researcher tends that thrust of
this project will be limited within the scope of how management’s performance
of small scale manufacturing firms are influenced by the choice of its pricing
policy and its profit planning. The study will focus primarily on small scale
manufacturing firms in Lagos state to be precise and its environs from where
the manufacturing firms of this study are drawn to enable the researcher
carryout on extensive investigation on this subject. The companies to be
studied are: vintage Nigeria plc ijanikin Lagos and Ojukwu pen farms igbesa
Ogun state.
1.7
LIMITATION OF THE STUDY
The researcher is limited by time constraints. Since the
semester is very short and has a bulk of academic exercise.
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The researcher is also constrained by
unavailability of funds required for an extensive research of this magnitude.
Finally and importantly,
most small scale manufacturing firms that were studied lack adequate and
organized accounting and decision making system, poor organizational chart and
structure also their general unwillingness to corporate or give out
information, all, these married the effectiveness of this research.
1.8
SIGNIFICANCE OF THE STUDY
This research will serve as
a guide to firms in setting the most advantageous pricing policy giving its
individual unique situation which will enhance profitability in the short and
long run situation. It will help them to avoid choosing arbitrary prices
without considering its distinctive situation and important factors.
It will serve as a guide in
choosing pricing strategy which strikes a balance between what the consumers
wants to pay for a product and the price the firm is willing to sell; also this
research will expose them (the firm) to the need for accounting information in
carrying out this decision.
The research work will also
be useful for the economy in the sense that if firms have substantial control
over price setting, then
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their
pricing behavior can influence national output/income and hence community
welfare.
Finally, the research work will be useful for those
carrying on further research on this or related topic.
1.9
DEFINITION OF TERMS.
PRICING POLICY: It
is a guiding philosophy or course of action designed to influence and
determine pricing decisions. Pricing policies set guidelines for achieving
objectives.
PROFIT PLAN: The
profit plan is the operating plan detailing revenue expenses and
resulting to net income for specific period of time. It is the firm’s optimal
plan in the light of management expectation in future.
COST: Expenses incurred to
procure something which may be labour, material, facilities or resources
PROFITABILITY: This
is the capacity or potential of an organization to make profit
PRICE: This
is the amount of money charged for a product or service, or a value that
a consumer exchanges for the benefits of having or using a product or service.
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VARIABLE COST: They
are cost that varies with level of production. They are constant per
unit but vary with total production.
PRODUCT: This
can be seen as any item, sub-assembly or cost unit manufactured or sold
by an organization.
MARKETING MIX: This
is the combination of the four primary elements that comprises of a
company’s marketing programmes which are price, place, product, and promotion
(advertising).
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