COST-VOLUME-PROFIT ANALYSIS AS A MANAGEMENT TOOL FOR DECISION MAKING A CASE STUDY OF NIGERIAN BREWERIES PLC

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY:

Cost-volume-profit analysis can be defined in so many ways. Firstly, cost can be defined as an amount of money given up in exchange for something else, usually goods and services. It is the amount that has to be paid or given up in order to get or obtain something. In business, cost is usually a monetary valuation of effort, material, resources, time and utilities consumed, risks incurred and opportunity forgone in production and delivery of a goods or services.

Cost-volume-profit analysis is a process of determining the breakeven profit of cost and volume of goods which can be useful for managers making short-term economic decisions and also for general educational purposes. It is also relationship between cost volume of activities and the effect of the relationship on profit. It is a tools that helps managers, business owners and entrepreneurs to determine the profit potential of a new firm or the impact on profit due to changes in selling price, cost or level of activities of current business.

Orjih (2001), defined cost-volume-profit analysis as “specific way of presenting and studying the inter-relationship between costs, volumes and profits”.  According to him, it provides information to management in a most lucid and precise manner.  It establishes a relationship between revenues and costs with respect to volumes.  It indicates the level of sales at which costs and revenue are in equilibrium.  This equilibrium point is commonly known as Break even point.  The break-even point is the point of sales volume at which total revenues is equal to total costs.  It is a point of zero profit.

According to Brown et al (1997), “some industries today are encountering problems raised by expansion through increased sales and the introduction of new products.  Many on the other hand are facing problem of contraction due to the introduction of substitute materials, products or reduced demand for their products.  Whichever is the case, it is vitally important that management should be in a clear position to plan for these changing levels of activity”.

Apart from the problem of contraction and expansion, during the period of economic depression, a business may be faced with the alternative of closing down or selling its products at a price below the total cost.  Also profit planning and control is made more difficult by the changes in the general pattern of demand for the type of products offered and the action of competitors.

In order to solve the problem created by the above situations, profit planning, cost control and decision making require an understanding of the characteristics of costs and their behaviour at different operating levels. One of the most important tools developed by accountants to assist management in meeting these challenges is cost-volume-profit analysis.

1.2       STATEMENT OF THE PROBLEM:

This study entitled “cost-volume-profit analysis as a management tool for decision making” goes to suggest how the application of cost-volume-profit analysis has helped managers in making decisions of the firm to ensure its growth and survival.

The challenges facing management are enormous particularly during this period of economic depression and they are as follows:

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

2.           Advanced state of competition and rivalry where only the fittest enterprises survive.

3.           Shortage of funds to buy the needed raw materials.

4.           Low capacity utilization.

1.3       OBJECTIVES OF THE STUDY:

The research will be focused on cost-volume-profit analysis as a management tool for decision making (A case study of Nigerian Breweries Plc).

The purpose of the study will be:

(i)   To evaluate the extent in which the cost-volume-profit analysis is applied in Nigerian Breweries Plc.  

(j)   To identify problems encountered in the practical application of CVP analysis and suggest possible solutions.

(iii)     To examine some other techniques that help in decision.

(iv)     To highlight the superiority of using cost-volume-profit over other forms of techniques.

1.4       RESEARCH QUESTIONS:

In this study, “cost-volume-profit analysis as a management tool for decision making” (A case study of Nigerian Breweries Plc) the following research questions come to mind:  They are:

(i)       Is Cost-Volume-Profit analysis extensively applied in Nigerian Breweries Plc?

(ii)      Has the application of the cost-volume-profit analysis helped Nigerian Breweries to be efficient and effective in its operations?

(iii)     What other technique apart from cost-volume-profit analysis does Nigerian Breweries employ in decision making?

(iv)     Are these other techniques superior to cost-volume-profit analysis?

1.5       RESEARCH HYPOTHESIS:

The hypothesis to attest to the questionnaire’s belief that cost-volume-profit analysis is a management tool for decision making can be tested as follows:

Ho:     Cost-volume-profit analysis is not extensively applied in Nigerian Breweries Plc.

H1:    Cost-volume-profit analysis is extensively applied in Nigerian Breweries Plc.

Ho:     The application of cost-volume-profit analysis has not helped the decision making and growth of the firm.

H1:    The application of cost-volume-profit analysis has helped the decision making and growth of the firm.

Ho:     Nigeria breweries Plc does employ other techniques in decision making.

H1:    Nigeria breweries Plc does not employ other techniques in decision making.

Ho:     Those techniques alternative to cost volume profit analysis is superior to cost volume profit analysis.

H1:    Those techniques alternative to cost volume profit analysis is not superior to cost volume profit analysis.

1.6       SCOPE OF THE STUDY

This topic, “cost-volume-profit analysis as a management tool for decision making” (A case study of Nigerian Breweries Plc) located at 9th mile depot Enugu state. The study of Nigerian Breweries9th Mile Depot Enugu shall also serve other States of the Federation since the some techniques are applied in other Depot.