Effect of Cost Drivers on the Operating Profit of Pharmaceutical Companies in Southwest Nigeria

Abstract

This study examines the impact of cost drivers on the operating profit of pharmaceutical firms in Southwest Nigeria, drawing on cost structure theory and transaction cost economics to explain the relationship between cost components and profitability. Adopting an ex-post facto research design, the study utilized secondary data sourced from the audited financial statements of twenty-one pharmaceutical firms both listed and non-listed on the Nigerian Exchange Group. A proportional stratified random sampling technique was employed to ensure representative coverage. The data were analyzed using a multiple regression model to determine the extent to which various cost drivers affect operating profit. Results revealed a strong, statistically significant relationship between cost drivers and operating profit, with an R² of 97.2% and a p-value of <0.001. The analysis confirmed that listing status significantly influences financial management practices, access to resources, and profitability, with listed firms outperforming their non-listed counterparts. Key cost indicators such as property, plant and equipment; credit purchases; credit sales; sales volume; debt levels; material costs; tax expenses; labor costs; training costs; and product lines were all significant at the 5% level. Based on these findings, the study concludes that effective management of cost drivers is essential for enhancing profitability, and that listing on the exchange provides a strategic advantage. The study offers valuable insights for industry stakeholders and policymakers aiming to improve financial performance and sustain competitiveness in Nigeria’s pharmaceutical sector.