Question

Samsung is thinking of expanding sales of its most popular smartphone model by 65%. Should we expect its variable and fixed costs for this model to stay within the relevant range? You make want to explain what the relevant range is and how costs behave within the range before answering the question regarding Samsung.

Answer 1

A 65% increase in sales of a popular smartphone model of Samsung is likely viewed as a substantial increase. When this occurs, the sales and cost structures are likely to change. Specifically, the selling price per unit, fixed costs, and variable costs are likely to change as the new sales volume moves out of the current relevant range. Variable cost per unit may go down, but total fixed costs are likely to increase due to, for example, more space needed to manage and accommodate the increase. Other activities that may increase are order processing, post-sales service, and invoicing.