CASE 5-1 MICROIMAGE TECHNOLOGY, INC. ILO 1, 21 I expected a net loss but not thi
ID: 2510415 • Letter: C
Question
CASE 5-1 MICROIMAGE TECHNOLOGY, INC. ILO 1, 21 I expected a net loss but not this big. And I certainly didnt expeg a negative gross profit! It looks like the more we sell, the mon we'll lose. I hope you come to the investor meeting next week with some explanations and some better numbers. SP Warren: Microlmage 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: In preparing for the meeting, Warren assembled the followingin. formation based on results for 2017: Units sold Selling price Manufacturing costs Microlmage Technology, Inc. Income Statement For the Year Ended December 31, 2017 80,000 80,000 $ 215 $17,200,000 Units produced Sales Less cost of goods sold Gross profit (loss) Less selling and 18,360,000 (1,160,000) S 1,280,000 1,200,000 Direct material costs Direct labor costs administrative expenses: Selling expense Administrative expense Net loss Variable manufacturing overhead: $3,750,000 4,900,000 160,000 00,000 Miscellaneous variable manufacturing overhead 320,000 Equipment maintenance Inspection costs 8,650,000 $ 9,810,000) Fixed manufacturing overhead: Rent The company is closely held, with six major inventors. Early in the first quarter of 2018, Warren Logan, company CFO, was pre- paring to meet with them to present profitability estimates for the coming 2 years. He expected the meeting to be somewhat hos- tile. Two days before, he had received an email from one of the investors, Sanjay Patel: 1,800,000 5,000,000 Depreciation Supervisory salaries Miscellaneous fixed manufacturing overhead 30000 $18,360,000Explanation / Answer
a. Income Statement for 2017 into Variable Costing Format is as Under:
Particulars
Sales
17,200,000
Less: Variable Costs
Direct Material Costs
1,280,000
Direct Labor Costs
1,200,000
Variable manufacturing overhead
880,000
(160,000 + 400,000 + 320,000)
Variable Selling Expense
1,200,000
(280,000 + 800,000 + 120,000)
Total Variable Costs
(4,560,000)
Total Contribution
12,640,000
Less: Fixed Expenses
Fixed Manufacturing Overheads
15,000,000
(1,800,000 + 5,000,000 + 4,500,000 + 3,700,000)
Fixed Selling Expenses
2,550,000
(1,900,000 + 650,000)
Fixed Administrative Expenses
4,900,000
(22,450,000)
Gain/(Loss) for the Year
($ 9,810,000)
From the above table it can be seen that contribution is positive. Therefore it is clear that any increase in sell of unit will increase the contribution.
Hence the contention of Mr Sanjay Patel, the more the company sells, the more it loses, is wrong.
b. Total contribution = $12,640,000
Contribution per unit = Total Contribution/ No. of Units Sold
= $12,640,000/80,000
= $158
Total Fixed Cost = $22,450,000
Break Even Sales(in Units) = Total Fixed Costs / Contribution Per Unit
= $22,450,000/158
=142,088.60 i.e. 142,089 units
Break Even Point (In amount) = 142,089 * Sale Price Per Unit
= 142,089 * $215
= $30,549,135
c. Budgeted income statement for two years based on Warren’s Assumption are as under:
Budgeted income statement for year 2018:
Sales (104,000 * 215) (WN 1)
22,360,000
Variable Expenses (Refer part a above)
(4,560,000)
Contribution
17,800,000
Less: Fixed Expenses
Fixed Manufacturing Overhead
15,000,000
(Refer part a above)
Fixed Selling Expenses
2,730,000
(1,900,000 + 650,000 + 180,000(Salary of two additional sales managers)
Fixed Administrative Expenses
4,790,000
(22,520,000)
(4,900,000 – 1,100,000)
Loss for the year
(4,720,000)
Working Notes:
Budgeted income statement for year 2019:
Sales (166,400 * 215) (WN 1)
35,776,000
Variable Expenses (Refer part a above)
(4,560,000)
Contribution
31,21,6000
Less: Fixed Expenses
Fixed Manufacturing Overhead
15,000,000
(Refer part a above)
Fixed Selling Expenses
2,640,000
(1,900,000 + 650,000 + 90,000(Salary of 1 additional sales manager)
Fixed Administrative Expenses
5,390,000
(23,030,000)
(4,790,000(2018 Expenses) + $600,000)
Gain for the year
$8,186,000
Working Notes:
With increase in sales in 2018, the loss has decreased and with further increase in sales in 2019 the corporation will achieve profit.
Hence, it can be said that investors will find the forecasted profits encouraging. However, there should be concrete basis for assuming increase in sales as the increase in profit is majorly due to increase in sales.
Particulars
Sales
17,200,000
Less: Variable Costs
Direct Material Costs
1,280,000
Direct Labor Costs
1,200,000
Variable manufacturing overhead
880,000
(160,000 + 400,000 + 320,000)
Variable Selling Expense
1,200,000
(280,000 + 800,000 + 120,000)
Total Variable Costs
(4,560,000)
Total Contribution
12,640,000
Less: Fixed Expenses
Fixed Manufacturing Overheads
15,000,000
(1,800,000 + 5,000,000 + 4,500,000 + 3,700,000)
Fixed Selling Expenses
2,550,000
(1,900,000 + 650,000)
Fixed Administrative Expenses
4,900,000
(22,450,000)
Gain/(Loss) for the Year
($ 9,810,000)
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