THE FFECT OF COST CONTROL ON PROFIT MAXIMIZATION

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THE FFECT OF COST CONTROL ON PROFIT MAXIMIZATION

PROFIT MAXIMIZATION: A STRATEGIC TOOL FOR SURVIVAL OF BUSINESSES IN NIGERIA

ABSTRACT

As we all know the objective of any business venture is to maximize profit. Hence all the decisions with respect to new projects, acquisition of assets, raising capital, distributing dividends e.t.c are studied for their impact on profits and profitability.

Profit maximization theory is based on profits and profits are a must for the survival of any business. Therefore, this research work focused on the effectiveness of profit maximization on Dangote Cement Plc as a case study.

The data used was gathered with the aid of a questionnaire and Chi-Square (x2 ) method of data analysis was applied in analyzing the data.

Based on the findings, the research reviewed that profit maximization occurs with efficient and effective use of resources by the employees in an organization. It also brings to the fore an organizations Strengths, Weaknesses, Opportunities and Threats in an attempt to be relevant and meet customer needs.

It was also discovered that cost volume profit analysis is the technique that is being used at Dangote Cement Plc when planning for profit cost. Hence, it is recommended that Business owners and Organizations interested in maximizing profit must review their cost structure regularly, must be diligent in cutting frivolous cost and boost productivity amongst employees. Furthermore, they must ensure that they make adequate provisions for contingency funds to help control risks and external factors that could hinder the progress of the business.

TABLE OF CONTENTS

Pages

Title Page i

Certification ii

Dedication iii

Acknowledgement iv

Abstract v

Table of Content vi

CHAPTER ONE: Introduction

1.0 Background of the Study 1

1.1 Statement of the Problem 2

1.2 Objective of the Study 3

1.3 Research Questions 4

1.4 Statement of Hypothesis 4

1.5 Significance of the Study 5

1.6 Scope of the Study 6

1.7 Limitation of the Study 6

1.8 Organization of the Study 6

1.9 Historical Background of Dangote Cement Industry 8

1.10 Definition of terms 9

CHAPTER TWO: Literature Review

2.0 Introduction 13

2.1 Current Literature Review 14

2.2 Meaning of Profit 11

2.3 Types of Profit 16

2.4 Approaches to Profit Maximization 17

2.5 Theory of Profit 18

2.6 Profit Maximization in Business 24

2.7 Limitation of Profit Maximization as an Objective in Business25

2.8 Importance of Profit 27

2.9 Justification of Maximization in Business 28

CHAPTER THREE

3.0 Introduction 31

3.1 Restatement of research Questions and Hypothesis 32

3.2 Research Design 32

3.3 Characteristics of Study Population 33

3.4 Sampling Design and Population 33

3.5 Source of Data 35

3.6 Method of Data Collection 35

3.7 Administration of Data Collection Schedule 36

3.8 Procedure for Processing Data 36

3.9 Statistical Method 37

3.10 Justification of Statistical Tool 37

3.11 Limitation of Methodology 38

CHAPTER FOUR: Data Presentation Analysis and Interpretation

4.0 Introduction 39

4.1 Presentation of Respondents Bio-Data 40

4.2 Presentation of Research Questions 43

4.3 Test of Hypothesis 49

4.3.1 Statement of Hypothesis 1 49

4.3.2 Statement of Hypothesis 2 52

CHAPTER FIVE: Summary, Conclusion And Recommendation

5.0 Introduction 55

5.1 Summary 55

5.2 Conclusion 56

5.3 Recommendation 57

Bibliography 59

Questionnaire 61

CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND OF STUDY

The ultimate goal of every firm in business is profit i.e. (Profit Maximization) and cost minimization in order to maximize shareholder wealth. Many industries today are facing problems due to the expansion through increases sales and the introduction of new product. Some on the other hand are facing problem of contraction owing to the introduction of substitute material. It is vital that management should be in position to plan for these changing levels of activities.

Apart from the problem of contraction and expansion during economic depression, an enterprise may be faced with the alternative of closing down or selling it at a price below the total cost.

Hence profit planning and control becomes difficult as a result of product offered and the action of competitor. In order to solve the problem created by the above situation profit, planning, cost, and their behaviour at different separating level, one of the most important tools developed by accountants to assist management in meeting the challenges is cost volume profit analysis.

According to I.M Pandey the analytical technique used to study the behavior of profit in response to changes in volume, cost and price, is called “Cost volume profit analysis” It is a device used to determine the usefulness of the profit planning process of the firm.

The entire field of profit planning has become associated with the cost volume profit relationship in organization. In micro-economics course, profit maximization is frequently cited as the goal of the firm; Profit maximization stressed the efficient use of capital resources but it is not specific with respect to the time frame over which profit are to be measured; Profit maximization function largely as a theoretic goal with economist using it to prove how firms behave rationally to increase profit.

Unfortunately, it ignores many real-world complexities that financial management firms must deal everyday with. Two major factors not considered by the profit maximization are Uncertainty and timing.

1.1 STATEMENT OF PROBLEM

The rising magnitude of the incessant profit or loss in Nigeria business organization over the year has become a thing of concern to managers; government, Policymakers, academia, entrepreneurs, financial analysis, economist and other stakeholders in the country’s economy. Various studies have been carried out to explain with empirical evidence, the factors driving profit and loss in business organization

The challenges facing most firms is numerous particularly during the period of economic depression or recession characterized by high liquidation of many companies, merger and acquisition, low technological powers, shortage of foreign exchange to buy needed raw material, high cost of production, erratic powers supply, high volume of imported goods and the advanced state of competition has affected drastically the maximization profit and cost maximization in most business organisation.

In a competitive world the key factors are cost price turnover and profit and these are factors which no business organization can ignore.

Management is faced with the problem of how to make effective and efficient use of their available scarce resources in order to achieve the objective of profit maximization.

Most management and organization lack under-standing on the importance of cost minimization as an effective tool or technique that has help in the sustainability on most business organization.

Most organization is faced with high cost of production which has led to inefficient utilization of the cost volume profit analysis technique.

1.2 OBJECTIVE OF THE STUDY

Profit planning and control are essential ingredients of every successful business in the world. The efficiency of management is measured by the amount of profit or loss in a given accounting year. The general objective of this study therefore will be;

1) To find a way of making use of scarce resource in order to achieve profit maximization.

2) To highlight the importance of profit using cost volume profit analysis over other forms of technique.

3) To identify the problems encountered in the economy that leads to lack of practical application of profit maximization.

4) To evaluate the extent to which the use of profit maximization on Dangote Cement Plc has been efficient.

1.3 RESEARCH QUESTIONS

1) Does your organization use cost volume profit analysis as a tool for profit planning and control?

2) Apart from cost volume profit analysis; what other techniques do you employ in the profit planning and control?

3) What problems does Dangote Cement Plc encounter in the profit planning and control?

4) In what ways specifically has the application of cost volume profit analysis helped the organization to achieve efficiency and effectiveness?

1.4 STATEMENT OF HYPOTHESIS

1. HO: Cost volume profit analysis as a tool for profit planning and control is not used in Dangote Cement Plc.

H1: Cost volume profit analysis as a tool for profit planning and control in Dangote Cement Plc.

2. HO: The application of cost volume profit analysis has not helped Dangote Cement Plc to be efficient and effective in its operations.

H1: The application of cost volume profit analysis has helped Dangote Cement Plc to be efficient and effective in its operations.

3. HO: Dangote Cement Plc does not employ other techniques in profit planning and control apart from cost volume profit analysis.

H1: Dangote Cement Plc employs other techniques in profit planning and control apart from cost volume profit analysis.

1.5 SIGNIFICANCE OF THE STUDY

It is hoped that this study will be of importance to students (Accounting, Banking and Finance, Business Administration, Economics etc) staff and management of business organization, the individuals in banking profession and the shareholders of the companies.

The students are to be aware of the role played by profit maximization in business organization. Profit maximization is an essential tool in all business organization.

In a competitive world, the key factors are cost, price turnover and profit, and these are factors which no business organization can ignore. Therefore, the significance of the study is as follows:

How the study of profit maximization and cost minimization of Dangote Cement Plc knows how their profit margin is increasing over time.

2. It is useful to student in schools since it will serve as a source of reference to them in the nearest future.

3. It is useful to the state since it is used by government in making decision for improvement of the states.

4. It is useful to the economy as a whole since it is used by policy makers to maximize profit in the economy.

5. It is a basis for understanding, contribution, margin pricing, related short run decisions and transfer pricing.

1.6 SCOPE OF THE STUDY

This study is to analyze the effectiveness of profit maximization tool in business growth in Nigeria as a tool for profit planning and control in general but with particular reference to Dangote Cement Plc. This is with the view of finding out how the company, has been able to manage cost in order to maximize profit.

1.7 LIMITATION OF THE STUDY

The study of the effectiveness of profit maximization as strategic tool in business growth in Nigeria using Dangote Cement Plc., Lagos State. In carrying out this study, I was faced with number of constraints some of which are:

FINANCE: Inadequacies of funds affected expenses on distribution and collection of questionnaires to respondent and from respondents; printing of questionnaires and other transport expenses in conducting the research.

TIME: There is need to observe lots of protocols in respects to levels of management before the collection soring that the primary data collected would be dependable to some extent, also the rationing of time so as to accommodate my other courses.

Nevertheless, these constraints were taken care of and with limited errors and variances.

1.8 ORGANISATION OF THE STUDY

The study is presented in five chapters. The first chapter introduces the study and establishes the problem to be addressed in the study. The background, the scope as well as the significance of the study is also discussed. Chapter two explores the review of literature; the third chapter reviews the research methodology and theoretical framework to be used. The fourth chapter presents the result of the analysis data and trend of Dangote activities in Nigeria during the years under review; while chapter five presents the conclusion, summary and recommendation of the study.

1.9 HISTORICAL BACKGROUND OF DANGOTE CEMENT INDUSTRY

Dangote Group of Companies was established in May 1981 as a trading business with, an initial focus on Cement, the group diversified overtime into a Conglomerate trading, salt, flour, sugar and fish. By the early 1990s, the Group had given into one of the largest trading conglomerate operating in the country.

In November 1992, Dangote Cement was incorporated on 4th, it was formally known as the Obajana Cement Plc and it was commissioned in 2003 as the largest cement plant in sub-Saharan Africa.

In comparison to local peers, Dangote Cement Plc significantly outplays other cement manufacturers, as it presently control about 57% of local manufacturing capacity, this is expected to rise even further to about 67% on completion of Ibese plant and Obajana’s 3rd and 4th by Q1.11 combining manufacturing (excluding BCC) and imports, Dangote Cement accounted for about 40% of total Cement supply as at 2009; overall market share rose to about 49% with the inclusion of BCC.

In line with Nigeria’s Millennium Development Goals, the huge deficit in infrastructure especially adequate housing and transportation – roads, rails and ports, present a major case for continuing growth in cement consumption in Nigeria over the next 10 years at least. Based on a broad base argument that cement demand is more likely to continue rising. In the medium to long term, we assess in this report, the key scenario, undergirding our expectation for cement demand in Nigeria, and present our outlook for Dangote cement’s revenue and profitability in the near to long term.

The company was granted a pioneer status for a period of 3 years with effect from January 1st 2009. The company is therefore exempted from payment of income tax in respect of profit accruing from manufacturing and sales of cement during the period to December 1st 2011.

1.10 DEFINITION OF TERMS

1. BREAK EVEN POINT: This is the level of operations at which a business revenue and expired costs (expense) are exactly equal.

2. BUSINESS: A commercial activity engaged in as a means of livelihood or profit, or an entity which engages in such activities. It is also the activity or the organized effort of an individual or a group of individuals making use of resources in the environment to provide and distribute goods and services at a profit.

3. COST: Cost denotes the amount of money that a company spent on the creation of production of goods or services. It does not include the mark-up for profit; it is also total money time and resources associated with a purchase or activity.

4. DIVIDEND: It is a taxable payment declared by a company’s board of directors and given to it’s shareholders out of the company’s current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property.

5. EFFICIENCY: Efficiency is the comparison of what is actually produced or performed with what can be achieved with the same consumption of resources (money, time, labour etc). It is an important factor in determination of productivity.

6. INVESTMENTS: Is an asset or an item that is purchased with the hope that it will generate income or appreciate in the future. In economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

7. MARKET: Market is a regular gathering of people for the purchase and sale of provisions, livestock, and other commodities. It is actual or normal place where forces of demand and supply operate, and where buyers and sellers interact (direct or through intermediaries) to trade goods, services, or contracts of instrument, for money or barter.

8. ORGANISATION: Is an elements or process of management concerned with the growth or change of the structure. It is a process of dividing and accountability within and external to the sections, the whole being coordinated to achieve the overall objectives.

9. PRODUCTS: Product is an article or substance that is manufactured or refined for sale. It is also a good or services that most closely meets the requirement of a particular market and yields enough profit to justify its continued existence.

10. PROFIT: The surplus remaining after total costs are deducted from total revenue, and the basis on which tax is computed and dividend is paid. It is the best known measure of success in an enterprise.

11. PROFIT MARGIN: The amount by which revenue from sales exceeds costs in a business. It is also a ratio of profitability calculated as net income divided by revenues or net profits divided by sales.

12. RESOURCES: Resource is an economic or productive factor required to accomplish an activity, or as means to under take an enterprise and achieve desired outcome. Three most basic resources include land, labour and capital; other resources include; energy, entrepreneurship, information, expertise, management and time.

13. SALE MIX: This can be defined as the relative proportions in which a company’s products are sold. The idea is to achieve the combination or mix that will yield the greatest amount of profits.

14. SHORT RUN: This is a period during which the quantity of at least one input is filled and the quantity of the other input can be varied.

15. TRANSFER PRICING: This is the rate of prices that are utilized when selling goods or services between divisions.

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