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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