Fountain Pens Limited

‘In fact we shall be out of business if we dare accept such deal. The
accounting figures cannot be wrong! Although I support the charitable
campaign for which the order will serve but to remain in business, we cannot
sell below 10% of our regular selling price....’
- James Coker, General Manager
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Fountain Pens Limited specializes in pen production and designs. The

company was formed in 2003 and has in recent years seen a rise in
the demands of its product. A remarkable feature of the company is its
unique design of pens to meet the specifications of the customers.
They also make pens for various charities, public sector organizations
and high street retail shops.

The following details relate to the income statement of Fountain Pens

Limited for the year ended December 31, 2012.

N’ m

Turnover1 65,000
Less: cost of sales 61,500
Gross profit 3,500
Less: selling & admin expenses 3,200
Operating profit 300

The company‘s fixed manufacturing costs were N34.5 million and its
fixed selling and administrative costs were N1.5 million. The company
uses local sales agents to sell its product. During the financial year,
about 1% of its turnover was paid as commissions to agents; these
are included in the selling expenses. During the year, 100,000 pens
were produced and sold.

1
Nigerian currency is denominated in naira (N) and Kobo (K). One hundred kobo
equals one naira.
A state government in the south-south region of Nigeria is currently
negotiating to place an order of 20,000 pens on a special order for
N8,000,000. The government intends to use it for HIV/Aids awareness
campaign in the state capital and has requested for these inscriptions
to be imprinted on each of the pens ‘ Be Aware HIV/Aids Kills’ and
‘Donated by the State Government’. These inscriptions will involve a
further cost of N100.

Although Fountain Pens Ltd has been producing below its full capacity,
the General Manager, Mr Coker is very reluctant to grant the order
despite pressure from the sales director. He argued that selling below
its normal sales price of N650 will be risky for the business, quoting
the statement that appears at the beginning of the case. He adds that
accepting the order might generate a price war with other competitors
and other established customers may also request for such deals.

The sales director although very disappointed with this decision

contemplates on any further steps to be taken.

Review Questions

a. Evaluate the effect of accepting or not accepting the offer on

operating income of Fountain Pens Ltd.

b. What is your view on the general manager’s statement quoted at

the opening of the case?

c. Discuss the possible challenges of accepting this offer.

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