Cost-Volume-Profit Analysis and Decision-Making in SMEs in Funtua Local Government Area
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Chapter One: Introduction
Background of the Study
Small and Medium Enterprises (SMEs) are critical to the economic growth and development of many nations, particularly in developing economies like Nigeria. These businesses contribute significantly to job creation, income generation, and innovation. Effective decision-making is crucial for SMEs to thrive in a competitive environment, and Cost-Volume-Profit (CVP) analysis has proven to be an essential tool in this regard. CVP analysis enables businesses to understand the relationship between costs, sales volume, and profit, providing a framework for pricing strategies, cost control, and profit planning (Horngren et al., 2012).
In Funtua Local Government Area (LGA), SMEs face challenges such as limited resources, fluctuating market demands, and rising operational costs. These challenges necessitate the use of advanced decision-making tools like CVP analysis to achieve financial stability and long-term growth. According to Drury (2018), CVP analysis helps businesses identify their break-even point, analyze the impact of cost changes on profitability, and make informed decisions about product mix and pricing.
Despite its advantages, the adoption of CVP analysis among SMEs in Funtua LGA is limited due to barriers such as lack of financial literacy, inadequate training, and resistance to change. Many SMEs rely on traditional or intuitive methods for decision-making, which may not provide accurate insights into their cost structures or profitability. This study seeks to explore the application of CVP analysis in decision-making among SMEs in Funtua LGA, examining its usage, benefits, and challenges.
Statement of the Problem
SMEs in Funtua LGA face significant challenges in making informed decisions due to inadequate cost analysis tools. While CVP analysis offers valuable insights into cost structures and profitability, its adoption is minimal, leading to suboptimal pricing strategies, poor resource allocation, and reduced profitability. This study investigates the use of CVP analysis in decision-making among SMEs in Funtua LGA, identifying barriers to its adoption and its impact on business performance.
Aim and Objectives of the Study
The aim of this study is to evaluate the role of Cost-Volume-Profit analysis in decision-making among SMEs in Funtua Local Government Area.
The objectives are:
1. To assess the extent of CVP analysis adoption by SMEs in Funtua LGA.
2. To analyze the impact of CVP analysis on decision-making and profitability.
3. To identify the challenges SMEs face in implementing CVP analysis.
Research Questions
1. To what extent is CVP analysis adopted by SMEs in Funtua LGA?
2. How does CVP analysis influence decision-making and profitability?
3. What challenges hinder the adoption of CVP analysis among SMEs in Funtua LGA?
Research Hypotheses
1. CVP analysis is not widely adopted by SMEs in Funtua LGA.
2. The use of CVP analysis significantly improves decision-making and profitability.
3. Challenges such as lack of financial literacy hinder the adoption of CVP analysis.
Significance of the Study
This study contributes to understanding the role of CVP analysis in enhancing decision-making and profitability among SMEs. The findings provide practical recommendations for SME owners and managers on adopting CVP analysis and guide policymakers in designing support programs. Additionally, the study enriches academic literature on cost analysis tools for SMEs (Bhimani et al., 2019).
Scope and Limitation of the Study
The study focuses on SMEs in Funtua Local Government Area and examines their use of CVP analysis in decision-making. Limitations include the diversity of SME sectors, which may influence findings, and the potential for inaccurate self-reported data from business owners.
Definition of Terms
• Cost-Volume-Profit (CVP) Analysis: A financial tool that examines the relationship between costs, sales volume, and profit to aid decision-making.
• Decision-Making: The process of selecting the best course of action from multiple alternatives.
• Small and Medium Enterprises (SMEs): Businesses with limited resources, typically employing fewer than 200 people.
• Funtua Local Government Area: An administrative region in Katsina State, Nigeria, with a vibrant SME sector.
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