Delta Co: Operating Income; Cash Flow Increase; Variable Costing Procedures

Delta Co. follows a policy of allocating all common costs equally among its profit centers. A partial responsibility income statement for a typical month is shown below:
Profit Profit Profit
Delta Co. Center 1 Center 2 Center 3
Responsibility margins $80,000 $40,000 $30,000 $10,000
Common fixed costs 45,000 15,000 15,000 15,000
Income from operations 35,000 25,000 15,000 (5,000)

After evaluating these data, Delta Co. decides to close Profit Center 3. This action eliminates all revenue, variable costs, and fixed costs traceable to Center 3 but eliminates only $3,000 in common fixed costs. Closing Profit Center 3 has no effect upon the responsibility margins of Centers 1 and 2.

1. Refer to the information above. Closing Profit Center 3 should cause Delta's monthly operating income to:
a. Increase by $5,000.
b. Decrease by $10,000.
c. Decrease by $7,000.
d. Change by some other amount.

2. Refer to the information above. After the closing of Profit Center 3, the monthly income from operations for Profit Center 1, as measured by Delta Co. should be approximately:
a. $25,000.
b. $19,000.
c. $13,000.
d. Some other amount.

3. Company XYZ operates subsidiaries in two countries. One of the subsidiaries consumes the output of the other in the production of a good for sale to the public. The company could increase cash flows by:
a. Using a transfer price based on full cost.
b. Using a transfer price to transfer as much income as possible to the subsidiary located in the lower tax country.
c. Using a transfer price based on market value.
d. Using a transfer price to transfer as much income as possible to the subsidiary located in the higher tax country.

4. Under variable costing procedures:
a. Variable manufacturing costs are viewed as period costs.
b. Fixed manufacturing costs are viewed as period costs.
c. All manufacturing costs are viewed as period costs.
d. No manufacturing costs are viewed as period costs.