Gallery 12 Company operates the franchise for grade school and high school pictures taken annually at some 4,000 sites in the upper Midwestern U.S. One of the continuing problems in this industry is retakes—returning to a site to re-photograph students who do not like the results of their first sitting.

Until now, no charge has been made for the second picture session; the cost is spread over all customers and reflected in the pricing of photo packages. Gallery 12 executives have proposed a $4 charge for a second sitting with slightly lowered picture prices for students who select poses from the first sitting. You are part of a management team that has analyzed the alternative proposal, and your team has just presented the following data to top management.
Required:
1. The current level of sittings is 1.4 million, and contribution margin per sitting is unchanged at $2.76. Calculate the projected change in operating profit from an increase of 100,000 sittings that the company could produce because of time savings from reduced picture retake sittings. Fixed costs are not expected to change under the new proposal.
2. Explain why the margin of safety (MOS) almost doubles from 12 percent to 20 percent, while the degree of operating leverage (DOL) falls by almost one-third (3.63 down to 2.37). As above, assume that fixed costs do not change.

Question

Gallery 12 Company operates the franchise for grade school and high school pictures taken annually at some 4,000 sites in the upper Midwestern U.S. One of the continuing problems in this industry is retakes—returning to a site to re-photograph students who do not like the results of their first sitting.

Until now, no charge has been made for the second picture session; the cost is spread over all customers and reflected in the pricing of photo packages. Gallery 12 executives have proposed a $4 charge for a second sitting with slightly lowered picture prices for students who select poses from the first sitting. You are part of a management team that has analyzed the alternative proposal, and your team has just presented the following data to top management.
Required:
1. The current level of sittings is 1.4 million, and contribution margin per sitting is unchanged at $2.76. Calculate the projected change in operating profit from an increase of 100,000 sittings that the company could produce because of time savings from reduced picture retake sittings. Fixed costs are not expected to change under the new proposal.
2. Explain why the margin of safety (MOS) almost doubles from 12 percent to 20 percent, while the degree of operating leverage (DOL) falls by almost one-third (3.63 down to 2.37). As above, assume that fixed costs do not change.

Quizplus · Accepted Answer

The Answer of Gallery 12 Company operates the franchise for grade school and high school pictures taken annually at some 4,000 sites in the upper Midwestern U.S. One of the continuing problems in this industry is retakes—returning to a site to re-photograph students who do not like the results of their first sitting.

Until now, no charge has been made for the second picture session; the cost is spread over all customers and reflected in the pricing of photo packages. Gallery 12 executives have proposed a $4 charge for a second sitting with slightly lowered picture prices for students who select poses from the first sitting. You are part of a management team that has analyzed the alternative proposal, and your team has just presented the following data to top management.
Required:
1. The current level of sittings is 1.4 million, and contribution margin per sitting is unchanged at $2.76. Calculate the projected change in operating profit from an increase of 100,000 sittings that the company could produce because of time savings from reduced picture retake sittings. Fixed costs are not expected to change under the new proposal.
2. Explain why the margin of safety (MOS) almost doubles from 12 percent to 20 percent, while the degree of operating leverage (DOL) falls by almost one-third (3.63 down to 2.37). As above, assume that fixed costs do not change.

Gallery 12 Company Operates the Franchise for Grade School and High