MicroImage Technology, Inc. produces miniature digital color cameras that can be attached to endoscopes and other medical devices. The cameras sell for $215 per unit and are disposed of after each use. For 2017, 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:

MicroImage Technology, Inc. Income Statement For the Year Ended December 31, 2017
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)

The company is closely held, with six major inventors. Early in the first quarter of 2018, Warren Logan, company CFO, was preparing to meet with them to present profitability estimates for the coming 2 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 2017:

Units sold	80,000
Units produced	80,000
Selling price	$ 215
Manufacturing costs:
Direct material costs	$ 1,280,000
Direct labor costs	1,200,000
Variable manufacturing overhead:
Equipment maintenance	160,000
Inspection costs	400,000
Miscellaneous variable manufacturing overhead	320,000
Fixed manufacturing overhead:
Rent	1,800,000
Depreciation	5,000,000
Supervisory salaries	4,500,000
Miscellaneous fixed manufacturing overhead	3,700,000
	$18,360,000
Selling expenses
Variable selling expense:
Shipping	$ 280,000
Commissions	800,000
Travel	120,000
Fixed selling expense:
Salaries	1,900,000
Miscellaneous fixed selling expense	650,000
	$ 3,750,000
Administrative expenses (all fixed)
Research and development	$ 2,700,000
Administrative salaries not related to R&D	1,300,000
Miscellaneous administrative expense	900,000
	$4,900,000

REQUIRED

1. a. Recast the full costing income statement for 2017 into a variable costing format. Does it appear, as Sanjay Patel contends, that the more the company sells, the more it loses?
2. b. Based on the previous information, calculate sales in dollars and units needed to break even in 2018.
3. c. Warren Logan, CFO, has developed assumptions that he believes are reasonable for 2018 and 2019. Using these assumptions, prepare budgeted income statements for 2018 and 2019 using the variable costing method. Are the major investors likely to find forecasted profits encouraging?

Assumptions for 2018

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 2019

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 2018.
3. Unit sales will increase by 60 percent over 2018.