BREAK-EVEN THEORY AND ACCOUNTING AS A MANAGEMENT DECISION A TOOL (A CASE STUDY OF NIGERIAN HOECHST PLC)

CHAPTER ONE

INTRODUCTION

1. 1. BACKGROUND OF STUDY

The success of a business is generally attributable in great measure of the ability of its management personal to cope with probable conditions of the future.  Short  range as well as long-term plans must be made accomplished through sound management evaluation.  However, many aids have been controlling and co-ordinating the function of their business.  One of the tool which encompasses vital and needed information in guiding companies profit path is the Break-Even theory.  This is an extension of marginal costing; basically.  It is concerned with the point at which revenue and costs intercedes, hence the term “Break – Even”.

Break-Even system is a simple and easily understandable method of picturing to the management the effect of changes in volume on profits.  It predicts the effects of managerial actions today on future profits and company survival.  Business people do not view costs outputs and profits may be affected by their actions.  With the aid of Break-Even theory, they will be able to understand more and data revealed by the Break-Even analysis.  This system involves the marshalling of the cost – volumer – profit data and other data to guide manager in its day-to-day decisions.  Some of the data are best seen in a chart form for management to get a perspective view of the profit structure.

Moreover, at the beginning of the century a planning tool was developed by WALTER RAUTENSTRAUCH called the Break-Even chart.  This development made a major contribution as a management aid in profit planning, forecasting and decision-making. The concept show the significance in a firm between it’s costs, volume and relationship between the costs, illustrate the relationship between the  cost, that-the selling price is constant irrespective of the volume.

1.2     HISTORICAL BACKGROUND OF NIGERIA HOECHST PLC

          On the 18th of December, 1963 the company was formed under the name “Hoechst Nigeria limited”.  The company was registered as a private limited liability company  with an authorized share capital of $10000 divided into 100 ordinary shares of $1 each on the 10th of January, 1964.

          August 4th, 1971 the PVA plant at Ikeja commissioned for use.  The major and company sold their 40% shareholding to E.O Ashamu and sons (holdings) Ltd.  The same day the name of the company was change to “Nigerian Hoechst.

          The authorized share capital was increased to N2 million by the creation of additional 600,000 ordinary shares of N2 each in 1977.  On October, 1978 the paid – up capital was increased to N3 million by public issued of N1 million which implies that the whole authorized capital of the capital  issued and fully paid-up.  A, year later, Nigerian Hoechst shares were quoted on Nigerian stock Exchange at 30K per share of 50k.

          The pharmaceutical factory and central warehouse at Ottah was commissioned on November 4th 1982.  Three years after, the authorized share capital on the company was increased from N10 million to N15 million while the paid-up capital increases from N7 million to N10.5 million by bonus issue of one ordinary share for every two ordinary shares held.  In 1991 the authorized share of the company was increased from N15 million to  N25 million by the creation of additional 20 million ordinary shares of 50k each and paid-up capital increases from N14 million to N17.5 million by bonus issue of one ordinary share for every four ordinary shares held.

          Nigerian Hoechst Plc has been engaged in pharmaceuticals and industrial chemicals for years.  The pharmaceutical factory is located at Otta while the PVA (Industrial chemical Division) is located at Ikeja.  Among their pharmaceuticals in market are the reformulated Daga,  Tabalon (an anti-rheumatic analgesics), fastaquine (a malaria preventive), Tarivid and Lasix etc.

          However, Nigerian Hoechst Plc is also engaged in high quality textile dyes, veterinary products, herbicides and paints pigments.  The registered office is situated at Ikeja.

1.3     STATEMENT OF PROBLEMS

          The research is borne out of the belief that Break-Even accounting technique is very vital to any form of business organization.  The analysis can be made for various conditions to reveal profitable, less profitable and unprofitable proposals; it is important to note that it brings home to  management. Dramatically the basic need to bring to light and the necessity of the significance of controlling costs and increasing in  sales will not solve the problems and not be used as anacea for profit.  Management in the cause of analyzing the company data in disclosing the company’s future profit structure few have the knack of quickly calculating the effects of alternative course of action and such calculations eat into high priced executive time.  Even they care frustrated in their attempts to use the conventional Break-Even techniques approach.  However, among the complaints of the pressing issues that poses difficult are:

1. Ineffective  decision of determining the profit of a particular product.
2. Unfavourable volume of output to aid in fixing the budgeted sales
3. Indecisive profitability of the various segments of the business
4. Inability of fixed price of the product.
5. Insensitive to the selection of the most profitable mix
6. Inability to decide on the volume of sale that will cover a reasonable return on capital employed
7. Lack of poor cash involved on obtaining a particular volume of output of the product.

1.4     OBJECTIVES OF STUDY

          The Break-Even theory and accounting technique portrays to management what the profit structure of their company is now and what it could become in the future under various proposed alternatives.  Some of the objectives are;

1. Validating the cash crunch involved in obtaining a particular volume of output of the product
2. Assessing the fixed price of the product
3. Making a careful consideration on the columns of output to aid in fixing the budgeted sales.
4. Deciding on the volume of sales that will cover a reasonable return on capital employed.
5. Analyzing the profitability of the various segment of the business
6. Evaluating the decisions of determining the profit of a particular product.
7. Selecting closely the most profitable mix

1.5     SIGNIFICANCE OF STUDY

          This is the importance of the study and the benefits derived from it, the following are the significance of the study.  The study will:

1. Identify the most profitable mix
2. Discover the effective decision tool in determining the profit of a particular product.
3. Show the profitability of the various segment of the business.
4. Evaluate the economic characteristics i.e. profit structure
5. Ascertain the interplay of the variables in the profit structure
6. Evaluate the future results of proposed actions
7. Make a change on the volume of sales to cover a reasonable return on capital employed.

1.6     HYPOTHESIS AND RESEARCH QUESTIONS

          Hypothesis is an assumption or a concession made for the sales of argument in order to draw out and test its logical consequence.

This is often in 2 forms:

1. Null  hypothesis- which is normally expressed as the ideal situation (H0)
2. Alternative Hypothesis- this is the converse of the Null Hypothesis (H1).

In carrying out this research work these conceptual statements are made to serve as a guide on which the work will be anchored.

1. Ho: That volume is the only relevant factor affecting cost

H1: Volume is not the only relevant factor affecting cost.

1. Ho: The major objectives of Break-Even techniques is profit planning and forecasting.

H1: the major objectives of Break-Even techniques is not profit panning and forecasting

iii.      Ho: variable unit cost does not vary in production ot the volume of production and consequently total production costs does not also change in proportion to the volume of production.

          H1: Variable unit cost vary with the volume of production.

          Generally statement of the Hypothesis can be deduced thus; “That there is a significant relationship between the major objectives of Break-even techniques as profit planning and forecasting and the management approach

RESEARCH QUESITON

1. Could a small amount of expansion for the coming year be done economically and be co-ordinated with the basic long-range plans for expansion?
2. What is the certain rate of return on investment in the product division and the total firm?
3. Is the company striving to get above average profit in the coming period when volume is expected to be relatively high?

1.7     SCOPE AND LIMITATION OF STUDY

The research attempts to give an insight into the practice of Break-Even theory and accounting as a means of an effective decision tool in the manufacturing companies.

Despite its limitation it discusses the purpose and importance of the techniques, the or of technique in operation and practiced by the company and the recommendation that will serve as a means of decision tool to improve the system.

          Also in the comparison of the comparison of the company’s system with other disparate manufacturing company in the same sector.  The research work is limited ot the sample frame under investigation.

1.8     DEFINITION OF TERMS

          The researcher finds it s worthy to define some important terms in the research work for a better understanding of their meaning and.

1. BREAK-EVEN: ANALYSIS: This is the term given to the study of the interrelationships between cost, volume and profit at various levels of activity, which produces neither profit nor loss.
2. MANAGEMENT ACCOUNTING: Is an integral part of management, requiring the identification, generation, presentation, interpretation and use of relevant information.
3. COSTS: These are operating expenses to the business
4. REVENUE: is the income derived from selling goods and services.
5. MARGINAL COSTING: it distinguishes between fixed cost and variable costs as conventionally classified