a. Recast the full costing income statement for 2020 into a variable costing format. Does it appear, as Sanjay Patel contends, that the more the company sells, the more it loses? 

b. Based on the previous information, calculate sales in dollars and units needed to break even in 2021. 

c. Warren Logan, CFO, has developed assumptions that he believes are reasonable for 2021 and 2022. Using these assumptions, prepare budgeted income statements for 2021 and 2022 using the variable costing method. Are the major investors likely to find forecasted profits encouraging? 

MicroImage Technology, Inc. produces miniature digital color cameras that can be attached to endoscopes. The cameras sell for $215 per unit and are disposed of after each use. For 2020, the company’s first full year of operation, the company had sales of 80,000 units and a net loss of $9,810,000, as follows: 

The company is closely held, with six major investors. Early in the first quarter of 2021, Warren Logan, company CFO, was preparing to meet with them to present profitability estimates for the coming two years. He expected the meeting to be somewhat hostile. Two days before, he had received an email from one of the investors, Sanjay Patel: 

Warren: I expected a net loss but not this big. And I certainly didn’t expect a negative gross profit! It looks like the more we sell, the more we’ll lose. I hope you come to the investor meeting next week with some explanations and some better numbers. 

SP 

In preparing for the meeting, Warren assembled the following information based on results for 2020: 

Assumptions for 2021 

1. The company will hire two additional sales managers at a base salary of $90,000 each. 

2. R&D will be cut by $1,100,000. 

3. Unit sales will increase by 30 percent. 

Assumptions for 2022 

1. The company will hire one additional sales manager at a base salary of $90,000. 

2. R&D will be increased by $600,000 over 2021. 

3. Unit sales will increase by 60 percent over 2021.

Transcribed Image Text:

MicroImage Technology, Inc. Income Statement For the Year Ended December 31, 2020 Sales $17,200,000 Less cost of goods sold 18,360,000 Gross profit (loss) (1,160,000) Less selling and administrative expenses: Selling expense $3,750,000 Administrative expense 4,900,000 8,650,000 Net loss ($ 9,810,000)