Required: 1)Calculate the contribution per unit of the company's normal production. (5 marks)

2) Calculate the contribution per unit of the special order for the Council, based on the terms offered.(5 marks)

3) How much would the company's operating income increase or decrease if Fountain Pens Ltd was to accept the Council's offer? (8 marks)

4)Explain whether you agree or disagree with the president's decision to reject the offer. In your explanation, set out the reasons in favour and against his decision. (12 marks)

Total: 30 marks

Question 4 a. Fountain Pen Limited specialises in pen production and designs. The company has recorded huge increase in the demand for its product. A remarkable feature of the company is its unique customisation of pens to meet customers' specifications. They also make pens for various charities and high street retail shops. (30 marks) The following details relate to the income statement of Fountain Pens Limited for the year ended December 31, 2015. Turnover Less: cost of sales Gross profit Less: selling & admin expenses Operating profit '000 10,000 6,000 4,000 3,100 900 The company's fixed manufacturing costs were 2.4 million and its fixed selling and administrative costs were 2.3 million. Sales commissions of 3% are included in the selling and administrative expenses. The total sales units during the year were 2 million pens. A local council has offered to buy 150,000 pens on a special order. The Council intends to use the pens as end of year gift to staff. To produce the order, a special clip bearing the Council logo and name would have to be made for each pen. Even though Fountain Pens Limited had some idle plant capacity, the president rejected the offer of 660,000 for the 150,000 pens. He argued: 'The Council's offer is too low. Though we would avoid paying sales commissions, we will have to incur an extra cost of 20 pence per clip for the council's logo and name on the pens. If Fountain Pens Ltd sells below its regular selling prices, it will begin a chain reaction of competitors' price cutting and of customers wanting special deals. I believe in pricing at no lower than 8% above our full costs of 9,100,000 (i.e. 2,000,000 @ 4.55 per unit) plus extra 20 pence per clip less the savings in commissions