Question

when talking about the costs of expanding business activities, what is the main importance of the relevent range in relation to cost behaviour?

Answer 1

As we know that for expanding business activities additional fixed expenditures need to be made hence every expansion of business activities requires investment of additional funds for the operations but in such cases relevant range always play a major role.

So first of all let’s understand concept of relevant range and behaviour of cost.

Relevant range refers to a span of production which does not affect overall fixed expenditures, in other words we can say that relevant range means lower & upper limit of the production volume. For example a machine is capable of manufacturing 0 to 10000 units then relevant range for such case will be 0 to 10000 units because after 10000 unit a new machine will be required hence when a firm is involving in expansion of business activities then firm have to consider relevant range because costs will behave on the basis of relevant range.

So it is clear that all associated costs change as per relevant range suppose there is a relevant range of 0 – 10000 units then any expansion whithin this relevant range will have some different costs in compare to expansion beyond such relevant range. Hence it is true that decision of expansion closely related with the relevant range and behaviour of the costs because behaviour of costs differs within relevant range or beyond relevant range.