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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1.2 STATEMENT OF THE PROBLEM
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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1.3 OBJECTIVES OF THE STUDY:
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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HYPOTHESIS TWO
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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