PROFIT PLANNING AND PRICING

1.0 INTRODUCTION

In this unit, you will learn how to discuss profit planning, explain pricing and how management applies them to the benefit of entrepreneurial growth and development.

1.0 OBJECTIVES

At the end of this unit, you should be able to:

1. Discuss profit planning 
2. Explain pricing 

2.0 MAIN CONTENT

3.1 Profit Planning

Budget is the profit plan base. A well managed enterprise usually produces a budget cycle planning the performance of the organisation as a whole including the profit projections. Profit planning is related to considering four main factors – fixed costs, variable costs, selling price and sales volume. Any change in one or several of other factors, affect the planned profit.

The management has to develop strategies in making sure these factors are properly mixed regarding the term – short, medium or long for the enterprise and the competitions thereof.

Self Assessment Exercise 2

Budget is the profit plan base. Explain

3.2 Pricing

In our study of pricing, there are many factors critical to the success of an enterprise’s short and long term plans. Importance is attached to cost control because of its susceptibility to control than other factors. In the concept of cost-volume-profit analysis is the centre of short-term planning, but in any given enterprise’s cost structure, price changes could affect both the sales volume and the profit level. (Consideration of the purchasing power, task demand rate etc). In short, management ability to improve profits through price changes will depend on its knowledge of how the market will react to such changes.

Therefore, a well formulated pricing policy or strategy which considers the likely effects of price changes on the market’s demand for the enterprises product, so as to plan a level of operation which, given the enterprise’s cost structure will produce the required profit.

We may therefore associate in the study of pricing, the problem of management in the two-fold aspect

1. The problem of control-in-the-large and 
2.  That of control-in-the-small. 

Pricing policy provides the means in which the enterprise can control to a degree, its relationship with its external environment (control-in-the-large) and at the same time, it is controlling its internal operations accordingly (control-in-the-small).

A further dimension to the problem of pricing: like if an enterprise formulates a pricing policy affecting its relationship with the market, such a policy has short term and long term implications (effect). Any alteration in the volume of demand for the enterprise’s products which results directly from its own pricing policy will affect its capital budgeting programme.
Hence, in summation an enterprise’s long-term projected plan should reflect its long-term pricing policy. Thus, short-term changes in that policy should be effected solely for providing that degree of flexibility which essential for effective long-range planning and control.

Self Assessment Exercise 1

Explain pricing and its implication, in an enterprise as a going concern.

3.0 CONCLUSION

Pricing in an enterprise has been shown as an integral decision form of an enterprise which aids in profit planning process and policy formulation.

4.0 SUMMARY

In the unit, pricing and profit planning were discussed in the line with the pricing policy and decision limitation of an enterprise.

5.0 TUTOR-MARKED ASSIGNMENT

1. What is pricing in an enterprise? 
2. Discuss profit planning giving the main factors of consideration