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CoursHeroTranscribedText: The following details relate to the income statement of Fountain Pens Limited for the year ended December 31, 2012. N' m Turnoverl 65,000 Less: cost of sales Gross prot Less: selling & admin expenses Operating prot The company's xed manufacturing costs were N345 million and its xed selling and administrative costs were N1.5 million. The company uses local sales agents to sell its product. During the nancial 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 Kobe ( 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 Govemment'. 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

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