Renew Tires Has Been in the Tire Business for Five

question 93

Essay

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?

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Definitions:

Specific Performance

A legal remedy requiring a party to perform their part of a contract, rather than paying damages for not fulfilling the contract.

Computer Program

A computer program is a set of instructions that a computer follows to perform specific tasks or operations, written in a programming language.

Indemnification

The act of compensating for loss or damage, often seen in contracts where one party agrees to protect the other against certain future claims or liabilities.

Negligently

Acting with a lack of proper care or attention to duties, resulting in harm or damage to others.