Define the relevant range of activity. with an example

Expert Solution

Solution: The relevant range of activity refers to a specific activity level that is bounded by a minimum and maximum amount. A certain revenue or costs level can be expected to occur within a designated boundaries and outside of that relevant range, revenues and expenses will likely differ from the expected amount. In cost behaviour analysis, relevant range represents the production bracket expressed in terms of unit within which fixed costs are indeed fixed.

For Example: Robert Inc. is a manufacturer of cars. It stores ready to use cars in a rented warehouse with a capacity of 15,000 units at one time. The rent charged is $150,000 per annum irrespective of the number of cars stored there, hence, it's a fixed cost. During 2015, sales dropped which resulted in increase in the number of cars to be stored in the warehouse. Ending inventory reached 18,000 units. Robert Inc. was forced to rent another warehouse with a capacity of 10,000 units at $100,000 per annum.

This Increase in rent will remain fixed till the maximum capacity of that second warehouse is reached i.e. inventory balance exceeds 25,000 units.

ekkarill92 answered 1 year ago

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