Question

Describe the term relevant range. Why is it important to stay within the relevant range when estimating costs?

Answer 1

Relevant range depicts specific activity level for a price point or cost point. It is defined by the minimum and maximum amount. Under this pre-defined boundaries, various revenues and expenses are intended to occur. Outside of this range, revenues and expenses will differ. Relevant range are important concept in step fixed costs.

One should identify relevant range in order to take advantage of cost estimation outside the relevant range. The total fixed costs and variable costs would be defined inside the boundary and outside the boundary only when the relevant range is defined. If production is doubled due to offer received, there will be requirement of labor, raw materials and even the factory space needs to be expanded.