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QUESTION 1

1. 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 retakesreturning 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.

   	Present			Proposed
   Margin of safety (MOS)	12	%		20	%
   Degree of operating leverage (DOL)	3.63			2.37
   Breakeven sittings per year	1,232,000			1,232,000

   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 2

1. Hightech Company recently developed the technology necessary to produce a low-end, a medium-end, and high-end computer memory chip for heart monitoring healthcare equipment. Budgeted fixed costs for the manufacture of all three products total $4,250,000. Budgeted sales, by product and in total, for the coming year were as follows:

   	Economy						Standard						High
   	Amount			Percent			Amount			Percent			Amount			Percent
   Sales	$	1,750,000		100	%		$	4,000,000		100	%		$	2,500,000		100	%
   Variable costs	$	1,207,500		69	%		$	1,000,000		25	%		$	1,250,000		50	%
   Contribution	$	542,500		31	%		$	3,000,000		75	%		$	1,250,000		50	%

   Actual sales for the year were as follows:

   Economy	$	4,000,000
   Standard	$	2,250,000
   High	$	2,000,000
   Total sales	$	8,250,000

   Required:

   1. Prepare a contribution income statement for the year based on actual sales data (but budgeted cost data, for both variable and fixed costs).

   2. Compare the breakeven sales dollars for the year based on both budgeted sales and on actual sales, assuming that the sales mix remains constant in terms of sales dollars. (Round contribution margin ratios, in all calculations, to three decimal places. Round answer in dollars up, to the nearest whole number.)

   3. The company president knows that total actual sales were $8,250,000 for the year, the same as budgeted. Because she had seen the budgeted income statement, she was expecting a nice profit from producing the memory chips. Explain to her what happened.