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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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