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9:39.10 -?05'AAI Case3MarginalCosting_... CASE STUDY ON #3 FOUNTAIN PENS LIMITED 'In fact we shall be out of business if we dare accept such deal. The accounting gures 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 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 specications 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 Turnover' 65,000 Less: cost of sales m Gross prot 3,500 Less: selling & admin expenses 1% Operating prot The company's xed manufacturing costs were N34.5 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. lNigerian currency is denominated in naira (N) and Kobo ( K ). One hundred kubo 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 further steps to be taken.