Auto Tires Has Been in the Tire Business for Four

question 133

Essay

Auto Tires has been in the tire business for four years.It rents a building but owns all of 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 $75 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 $60.
The president of Auto Tires is somewhat displeased with the company's management accounting system because the cost behavior patterns displayed by the monthly breakeven charts are 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 breakeven 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:

Substitutes

Goods or services that can be used in place of each other, fulfilling the same needs or desires.

Complements

Goods or services that are used together, where the use or consumption of one enhances the use or consumption of the other.

Law Of Supply

The Law of Supply states that, all else being equal, an increase in price results in an increase in the quantity supplied.

Quantity Supplied

The supply of a good or service that businesses intend to sell, given a certain price point.