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COST REDUCTION METHODS AND ITS EFFECT ON THE PROFITABILITY OF A MANUFACTURING COMPANY

CHAPTER ONE
1.1    OVERVIEW OF STUDY
Business of all sorts are established by their respective owners for the purpose of achieving some set of objectives. These objectives may vary in principles and in practice. Ogbor, J.O and Olannye, A.P (2011:46) defined objectives as the specific steps a firm needs to take in order to achieve its goals. It is also a detailed picture of a step you plan to take to in order to achieve a stated aim (The times 2012:1). It went further to state that a business objective must fulfill the following criteria for it be termed as such. These are:

  1. It must specific, clear and easy to understand.
  2. It must be measurable/quantifiable
  3. It must achievable i.e possible to be attained.
  4. It must be realistic in nature.
  5. It must be time bound. 

The financial objective focused on the achievement of sound financial performance years – in, year out. (Ogbor, J.O and Olannye, A.P, 2011: 47). Hostrand, D. (2009) argued that profitability is the primary goals of all business. This is the state or condition by which a firm yields financial gain or profit (Business Dictionary, 2012). The concept of profitability is used to ascribe an on going process in which a business entity yield better returns when compared with its investment.
Peavley, R (2012) pointed out that every firm is most concerned with its profitability as it represents a favourable height any firm would want to attain in its operations. Keys indicator of profitability of a firm is the profitability ratio which shows the overall company’s efficiency and performance and makes use of the following instruments.

  1. Gross profit margin
  2. Operating profit margin.
  3. Net profit margin.
  4. Cash margin.
  5. Return on investment.
  6. Return on equity.
  7. Cash returns on assets.

A careful analysis of the profitability of business firm would go a long way to determine the survival and sustenance of any business concern (Hofstrand, 2009). The all important concept of profitability is a function of sales (turnover) and cost of production (Pz cussons, 2012). Recent researches conducted by experts and research institutes on the profitability level of manufacturing companies have observed a declining state of companies profit-frost and Sullivan (2012) enumerated factors that can causes this ugly trend as:-

  1. The presence of numerous competitors.
  2. Efficiency or inefficiency of the sales force of a company
  3. Ageing products and services
  4. Business environment peculiar to a company.
  5. Economic conditions of the country.
  6. Rising cost of operations.

It is pertinent to note here that of all the problems enumerated above, the cause of declining profitability of companies and which has its tell on these business entities. This is made manifest in the increasing cases of folding up of erstwhile vibrant companies. The institute of chartered accountants of Nigeria (2009:49) suggested that an effective all-inclusive cost reduction exercise would alleviate this corporate challenge.
The research work shall beam its search on the reduction methods available to a manufacturing company, special emphases shall be paid to its effect on the profitability of such entity with a view to establishing a link between these two salient important concepts.

1.2    STATEMENT OF PROBLEM
Donovan, (2012) observed that the need to adopt various cost reduction techniques and methods have become paramount owing to the quantum of challenges accruing from high cost of production. These problems are:

  1. To determine high cost of production in manufacturing concerns.
  2. Ascertain the relationship between production cost and profitability.
  3. To adopt a control cost measure to reduce expenditure.
  4. To achieve organizational goal through the tool of various planning kits.

The above challenge vis-à-vis the accumulative effect on the profit level of a manufacturing company has thus prompted the research to look into the adoption of the various cost reduction methods as an antidote to the problem at hand.

1.3    OBJECTIVE OF STUDY
The business end of the study is to use the various cost reduction methods a tool for achieving the following targets:-

  1. To ascertain and hence reduce the cost of production of manufacturing companies.
  2. To establish the relationship between the cost of production and the profit level of business entities.
  3. To help develop a cost control limit that will help keep expenditure within acceptable limit.
  4. To serve as a planning decision making tool for organizational goal attainment.

To this end, it is hope to be established that cost reduction methods would have favorable impact on the profit level firms.

1.4    RESEARCH QUESTIONS
Santiago, N. (2009:1) opined that a research question is an organizing element for the topic under review. It focuses one’s investigation into a narrow set of question to be answered in the course of the study. The research questions are sets of questions which the research hoped the study would give answers to (Asika, N. 1991:65). This project seeks to answer the following questions:-

  1. Can cost reduction methods impact on the profitability of manufacturing companies?
  2. Is high cost of production a major determinant of low demand?
  3. Can cost reduction improve market share of companies?
  4. Would cost of production impact on the storage cost of manufacturing companies

1.5    STATEMENT OF HYPOTHESIS

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