Renew Tires has been in the tire business for five years. It rents a building but owns its equipment. All employees are paid a fixed salary except for the busy season (April - June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season.
Selling prices per tire average $50 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $40.
The president of Renew Tires is somewhat displeased with the company's management accounting system because the cost behavior pattern displayed by the monthly break- even charts is inconsistent; the busy months' charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the break- even point.
Required:
a. What is wrong with the accountant's computations?
b. How can the information be presented in a better format for the president?

Question

Quizplus · Accepted Answer

The Answer of Renew Tires has been in the tire business for five years. It rents a building but owns its equipment. All employees are paid a fixed salary except for the busy season (April - June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season.
Selling prices per tire average $50 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $40.
The president of Renew Tires is somewhat displeased with the company's management accounting system because the cost behavior pattern displayed by the monthly break- even charts is inconsistent; the busy months' charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the break- even point.
Required:
a. What is wrong with the accountant's computations?
b. How can the information be presented in a better format for the president?

Renew Tires Has Been in the Tire Business for Five