CHAPTER ONE
INTRODUCTION
1.1 BACK GROUND OF STUDY
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.
However in explaining the importance of
pricing, Egbunike (2007:83) sustained that setting the price for an
organizations 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 of revenue it generates to satisfy the share holders of the
organization.
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.
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 influences pricing decisions
according to him, this includes: Manufacturer’s pricing objective, economic
situation, level of competition, and availability of close substitute.
For pricing to be effective, firms must
incorporate all these factors in selecting the most advantageous price for it’s
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).
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 plans exist, there will be no basis for firm to compare or
evaluate their performance.
Based on the foregoing, the problem of
this study is in three (3) folds.
Firstly, 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.
Secondly, 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.
Thirdly, and 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.
1.3 OBJECTIVE
OF THE STUDY:
This
research is aimed at achieving the following objectives.
(i) To establish the efficiency and
effectiveness of pricing policy in selected firms.
(ii) To find out the various factors that
influence pricing decisions in selected firms.
(iii) To determine if pricing decision (s) can make
an impact on a firm’s profit and efficiency.
(iv) To investigate if profit planning (or
budgeting) can result in cost reduction and increased profit performance.
(v)
To make recommendation based on the
findings of this study to the management of firms.
1.4 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.
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.
1.5 SCOPE AND LIMITATION 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 Anambra state Awka 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: Crescent spring waters Awka and winco foam limited Agu Awka.
1.5.2 LIMITATION
OF THE STUDY
The
researcher is limited by time constraints. Since the semester is very short and
has a bulk of academic exercise.
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.
1.6 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
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