I am having a difficulty with Expand/Collapse function in Word. When I collapse the last Heading, it collapses everything below, more specifically it also collapses a picture, which I do not intend to be a part of the body under the aforementioned heading.

For example (-> represents the collapse button):

-> X. Blah blah
(Body) more blah blah



"IMAGE"

When I collapse, it becomes:
-> X. Blah blah


As you see, the image is also gone, which I do not want.

Please enlighten my poor soul.

You could apply a style of that outline level to the image. That would likely have poor consequences in a Table of Contents, though. The image could show up in the TOC.