MIT WPU School of Management (PG)

CASE STUDY ON #3 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.