The Effect Of Marginal Cost Elements On The Financial Performance Of Pharmaceutical Companies In Nigeria

Project and Seminar material for Public Administration

Abstract

The broad objective of the study is to evaluate the effect of marginal cost elements on financial performance or pharmaceutical companies in Nigeria using GlaxoSmithKline consumers’ plc, May and Baker Nig. Plc, Neimeth international, may and Baker Nig. Plc as case studies. The specific objective however is to examine the impact of cost of sales, cost of research and development and selling and administration expenses on the ROA of the quoted companies. Five years secondary data from the annual report and accounts of the three companies quoted on the Nigeria stock exchange were collected and regression analysis was utilized in the data analysis. The study found a negative and insignificant relationship between cost of sales and ROA. Also, cost of research and development was found a negative and insignificant relationship with the ROA. Finally, selling and administration expenses had a positive but insignificant relationship with ROA. The study recommends that against others, marginal must be minimized to the barest minimum so as to maintain a high level of profitability.

Chapter One

Introduction

1.1 Background of the Study

Recently the common concern to every participant in a market economy is the magnitude at which price of goods are multiplied in recent time in Nigeria. This is in addition to the multiplier effects associated with the process of transacting business in Nigeria for instance as customers complain bitterly of exorbitant prices likewise pharmaceutical companies remain worried about how profitability returns in the face of ever increasing competition. Even low buying power of customer, low capacity utilization and international market that are characterized by differentiated products. As a result customers shift from one product to another in search of value that rarely comes despites their reaches to purchase. They are all confronted with higher price low quality adulteration and at times temporary scarcity in place of value for money objectives they pursue. The management of different companies also seeks for cover everywhere to justify low profitability return while trying to checkmate competition and its resultant effect on financial performance caused by product proliferation and limitations.

To satisfy the above multifarious requirement, pharmaceutical companies are advice to apply marginal cost elements which refer to the value of what is given up in order to produce that additional unit which are practically applied by evaluation of performance, profit planning through calculation of present value (PV) ratio of company to plan the activities in such a way that the profit can be actualized fixation of selling price decision making and cost control which help to increase profitability of a company. Therefore, it cost management is to be there should be added up and be managed by competent hands. Financial performance of a pharmaceutical company uses financial statement analysis as the most objective way to evaluate financial performance.

Financial analysis involves assessing the leverages profitability operational efficiency and solvency for company financial ratios are the principal tools used to conduct the analysis and the challenge knows which ratios to choose from and how to interpret the results.

1.2 Statement of the Problem

This research is primarily carried out by marginal cost elements available to some pharmaceutical companies in Nigeria more also it goes ahead to relate the financial performance of these pharmaceutical companies to direct material direct labor and overhead respectively. Hence the research aims at evaluating financial performance of pharmaceutical companies using the marginal cost element as a yard stick.

Marginal costing is a techniques used in reporting costs and profit of a firm. There should be separation of cost into fixed and variable costs. In marginal costing product cost include variable production cost such has direct material, direct labor, direct production overhead expenses. It ignores fixed cost and semi-variable cost. The separation of cost into fixed and variable cost is difficult, in reality manufacturing can’t take place without plant facilities and equipment hence fixed manufacturing cost are part of the production and should not be excluded.

Marginal costing fail as to take into consideration that in the long run, fixed cost will be part of the total cost of production than of a unit of an item. It is therefore not an appropriate tool in making pricing decision of a firm.

In the preparation of profit and loss account, the use of marginal cost is limited to the internal parties of a firm such as the management. In computing profit for tax purpose, marginal costing is not accepted method, because it does not include all cost used in production process. Therefore in preparation of profit and loss account meant for external uses such as shareholder investors, government and the public, using marginal costing will not present true and fair view of the financial affairs of the firm.

1.3 Objectives of the Study

The primary objective of the study is to evaluate the effect of marginal cost element on financial performance pharmaceutical companies in Nigeria using Glaxosmithkline consumers’ plc, may and baker Nigeria plc, Neimeth international as case studies as well as determines its impact with respect to their profitability.

Above all, this study aims at highlighting the various marginal cost elements and it contributions to the effectiveness and efficient running of pharmaceutical companies.

The specific objectives of the study are

To ascertain the relationship between cost of sales and financial performance to pharmaceutical companies in Nigeria.
To determine the relationship between research and development expenses and financial performance of pharmaceutical companies in Nigeria.
To determine the relationship between selling and administration expenses and financial performance of pharmaceutical companies in Nigeria.

1.4 Research Hypothesis

In this research work the researcher formulated a number of research hypothesis in which the study will be based on. The hypothesis used includes null hypothesis “Ho” and alternative hypothesis “Hi”.

Ho: There is no significant relationship between cost of sales and financial performance pharmaceutical companies in Nigeria.
Hi: There is a significant relationship between cost of sales and financial performance pharmaceutical companies in Nigeria.
Ho: There is no significant relationship between research and development expenses and financial performance of pharmaceutical companies.
Hi: There is a significant relationship between research of pharmaceutical companies.
Ho: There is no significant relationship between selling and administration expenses and financial performance of pharmaceutical companies in Nigeria.
Hi: There is significant relationship between selling and administration expenses and financial performance of pharmaceutical companies in Nigeria.

1.5 Significance of the Study

The aim of this study is to stimulated the interest of people on the implication of marginal cost on the financial performance of pharmaceutical companies and how it would further serve as a guide or reference for the younger and future researcher who may carryout research investigation in this area of study. It will in no doubt be of no importance to the companies using case studies of Glaxosmithkline consumers plc, may and Baker Nig. Plc, Neimeth international, because the findings will assist the companies in the following areas: increases the company’s profit marginal, help in reduction of marginal costs, help in the proper classification of the marginal cost into variable and fixed costs.

1.6 Scope and Limitation of the Study

This research work is central on the effect of marginal cost element on the financial performance of pharmaceutical companies specifically Glexosmithkline consumer plc, may and Baker Nigeria plc, and Neimeth international and will endeavor to show all relevant information that will enhance the actualization of the research objectives put into place. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.9 Definition of Terms

Marginal Cost:

In economics, marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good.

Financial Performance:

Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues.

Pharmaceutical Company:

The pharmaceutical industry discovers, develops, produces, and markets drugs or pharmaceutical drugs for use as medications. Pharmaceutical companies may deal in generic or brand medications and medical devices.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the effect of marginal cost element on financial performance of pharmaceutical companies in Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of the marginal cost element on financial performance of pharmaceutical companies in Nigeria

5.2 Summary

This study was on the effect of marginal cost element on financial performance of pharmaceutical companies in Nigeria. Three objectives were raised which included:To ascertain the relationship between cost of sales and financial performance to pharmaceutical companies in Nigeria, to determine the relationship between research and development expenses and financial performance of pharmaceutical companies in Nigeria, to determine the relationship between selling and administration expenses and financial performance of pharmaceutical companies in Nigeria. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of GlaxoSmithKline consumers’ plc, May and Baker Nig. Plc, Neimeth international, may and Baker Nig. Plc were selected in Lagos. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up human resource managers,suppliers,accountants and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

5.3 Conclusion

The results of the study partially support the proposition that the size of a business influences the importance placed on the types of pricing information. Although the data tentatively shows cost information more preferred by larger businesses and market information more preferred by smaller businesses. Across the sample full costs are considered with higher importance when compared to variable costs, customers and competitors in terms of both information and pricing method. The use of cost-plus pricing is not universal, with some businesses changing pricing methods when modifying the prices of existing products and services.

5.4 Recommendation

Companies should use the costing techniques that are most suitable for their environment. For instance, the level of technological advancement, size of the company, stage of the product and culture.
There should be naturalistic research for the development of cost and management techniques
Companies should only adopt those techniques that have practical basis and those techniques that their competitors have successfully adopted.

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