Chapter 1 - R

[PROFITABILITY ANALYSIS AND ITS DETERMINANTS OF A MEDIUM-SCALE FOOD MANUFACTURING ENTERPRISE IN BAYOMBONG NUEVA VIZCAYA]
A.Y. 2011-2012
Chapter 1
THE PROBLEM AND ITS BACKGROUND
Introduction Profitability, in general, is the efficiency of a company or industry at generating earnings. Profitability analysis can have a huge impact on returning investment and remaining competitive in the marketplace. Many authors agree that it is necessary to invest to make a business profitable no matter what kind of business. It also seems reasonable that current profitability is related to future investment and that current investment is related to future profitability (Sloan 1996, Fairfield et al. 2002 and 2003, Richardson et al. 2004 and2005). The main objective of this study is to carry out an overall analysis of the worthiness of producing health food noodles. The results of this research provide the decision makers with tools that form a broad basis on which product will generate more profit but would have lesser production costs. For many businesses understanding, their relative cost position and/or the profitability of a multi-line offering is a vital but neglected part of their strategies. It is surprising how many times the widely held mantra that we are a low cost producer turns out on CHAPTER 1 | The Problem and Its Background 1-1
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analysis not to be true and is a primary cause of loss of market share or specific contracts. Similarly a number of clients have failed to adequately understand just where and with what they make their money. Detailed product line profitability analysis often reveals opportunities to eliminate poorly contributing products/services and their attendant costs or for re-pricing to improve margins.
Statement of the Problem

If a pricing method is to succeed in any way, a much clearer understanding of the implementation process and its relationship to the capacity and demand curve is needed. Specifically, related to the case to be studied, the following questions shall be answered: 1. What is the profile of the organizations offering the same product line in terms of the following: 1.1 Business Office Location 1.2 Nature of Business 1.3 Number of Years of Operation 1.4 Range of Products offered 1.5 Price of Products to be compared CHAPTER 1 | The Problem and Its Background 1-2
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2. What is the trend on operating margin of each product line during the 5-fiscal periods starting 2006? 3. What product line contributes the largest percentage on the overall income of the firm? Significance of the Study The results of this study will be beneficial to the following: Business Communities. Nowadays, many businessmen are now venturing to health food products. Investors consider the profitability of the company. In connection to this, this study will serve as a benchmark for potential investors who want venture in health food products. Future Researchers. The results of this study may be used by students and other researchers for a more intensive and extensive analysis and investigation of the profitability of a medium-scale and eventually large-scale enterprises here in the region.
Scope and Delimitation The study will focus only on the profitability analysis of products lines based from the annual income statement for the 5 consecutive years of the manufacturing firm. In addition, the income derived from the income statement will then be the basis for the computation of the percentage contribution of each product line on the company s overall profit. As a measure of profitability, stability of profit of each
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product line for the 5-year operating periods will also be considered. Net profit margin for the most recent year of each product line will then be compared to the following selected competitors: Monde Nissin noodle products, Nestle. Also, the researchers will investigate a medium-scale enterprise engaged in manufacturing food products. The firm to be studied, shares in a monopolistic competitive market, which uses process costing. Its main industrial unit is administered locally in Nueva Vizcaya.
Conceptual Framework The theoretical framework used in the study is the Input-Process-Output Model. In the IPO model, a process is viewed as a series of boxes (processing elements) connected by inputs and outputs. Information or material objects flow through a series of tasks or activities based on a set of rules or decision points. Flowcharts and process diagrams are often used to represent the process. (Harris & Taylor, 1997) What goes in is the input, what techniques to be used is the process, what comes is the output. (Armstrong, 2001). The IPO model will provide the general structure and guide for the direction of the study. Substituting the variables of this study on the IPO model:
A.Y. 2011-2012
Figure 1: Paradigm of the Study
INPUT
Profile of organizations offering the same product line y Business office location y Nature of business y Number of years of operation y Prices of product lines to be compared Determinants of Profitability y Net Profit margin of competitors
PROCESS
y Interview
OUTPUT
y Trend Analysis and Benchmarking
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The input refers to the profile of organizations offering the same product line of the sample enterprise. The profile variables of organizations offering the same product line include: (1) Business office location, (2) nature of business, (3) number of years of operations, (4) prices of each product lines. The determinants of profitability of organizations offering the same product line with the sample enterprise offering health food products includes the profit margin of the corresponding competitors of the firm. The arrow connects to the process to the process which includes the interview. Then the arrow connects to the output which will be the trend analysis on net profit margin and for benchmarking.
Definition of Terms Account-based Profitability Analysis- a form of profitability analysis organized in accounts and using an account-based valuation approach. The distinguishing characteristic of this form is its use of cost and revenue elements. It provides a profitability report that is permanently reconciled with financial accounting. Benchmarking- is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost. In the CHAPTER 1 | The Problem and Its Background 1-6
A.Y. 2011-2012
process of benchmarking, management identifies the best firms in their industry, or in another industry where similar processes exist, and compare the results and processes of those studied (the "targets") to one's own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful. Fiscal Year ( or financial year, or sometimes budget year )- is a period used for calculating annual ( yearly ) financial statements in business and other organizations. In many jurisdictions, regulatory laws regarding accounting and taxation require such reports once per twelve months, but do not require that the period reported on constitutes a calendar year (i.e., January through December). Fiscal years vary between businesses and countries. Fiscal Year may also refer to the year for income tax reporting. Health Food Product- foods defined by the lay public as foods with little or no preservatives, little processing, enrichment or refinement and often grown without pesticides. Manufacturing- the process of converting raw materials, components, or parts into finished goods. Medium-scale enterprise a business that has a sufficient availability of
materials, manufacturing capacity, after sales service to support a market size as large as a province.
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Monopolistic competition- is a form of imperfect competition where many competing producers sell products that are differentiated from one another. Each producer can set its price and quantity without affecting the marketplace as a whole. Net profit margin- net income expressed as a percentage of revenue. Net income/ Total Revenue x 100 Profitability- the state or condition of yielding a financial profit or gain. Profitability analysis- the process of identifying the financial strengths and weaknesses of a firm with respect to profitability Profitability ratios- measures that indicate how well a firm is performing in terms of its ability to generate profit. Product line- a series of different products which form a group, all made by the same company. Trend Analysis- is the practice of collecting information and attempting to spot a pattern, or trend, in the information. In some fields of study, the term "trend analysis" has more formally-defined meanings. Although trend analysis is often used to predict future events, it could be used to estimate uncertain events in the past.
A.Y. 2011-2012

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[PROFITABILITY ANALYSIS AND ITS DETERMINANTS OF A MEDIUM-SCALE FOOD MANUFACTURING ENTERPRISE IN BAYOMBONG NUEVA VIZCAYA]

THE PROBLEM AND ITS BACKGROUND

Statement of the Problem

CHAPTER 1 | The Problem and Its Background 1-3

CHAPTER 1 | The Problem and Its Background 1-4

Figure 1: Paradigm of the Study

CHAPTER 1 | The Problem and Its Background 1-5

CHAPTER 1 | The Problem and Its Background 1-7

CHAPTER 1 | The Problem and Its Background 1-8

CHAPTER 1 | The Problem and Its Background 1-9

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