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. Turnover Less: cost of sales Gross profit Less: selling & admin expenses Operating profit N'm 65,000 61.500 3,500 3.200 3.00 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. 'Nigerian currency is denominated in naira (N) and Kobo (K). One hundred kobo equals one maira. 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.