Question

What is relevant range? What role does the relevant range concept play in explaining how costs behave?

Answer 1

Relevant range is a band of normal activity or volume where in there is a specific relationship between between the level of volume or activity and the costs in question. The costs are determined as fixed or variable in a particular relevant range. Fixed costs are fixed only for a particular relevant range of total activity or volume and only a given span of time. For example, a company operating a truck for transportation will incur fixed costs of $50,000 when it operates between 10,000- 20,000 miles. It means that the fixed costs will remain $50,000 irrepsective of whether the truck runs 10000 miles or 20,000 miles. With respect to variable costs as well they may not change proportionately when the activity volume changes. For example, as more number of units produced increases the variable cost per unit reduces due to economies of scale upto a certain point.