Question
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
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 months except those in the busy season.
Normal selling prices per tire average $50. 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 accounting system because the cost behavior pattern displayed by the monthly break-even charts is inconsistent; busy months' charts are different from 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?
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