The Concept of ‘Relevant Range’ Analysis Sample

Paper Instructions

Academic level – Undergraduate 1-2
Type of paper – Analysis
Topic Title – The concept of ‘relevant range’

Instructions:

Discuss the concept of “relevant range”. Why and how is this concept important in costing decisions? The readings for this week also discuss mixed costs. What are some examples of mixed costs and why are these costs separated from fixed and variable cost components?

Analysis Sample

Every company must consider costing, which involves managing the costs involved in creating a product or providing a service. Mixed costs, on the other hand, which include both fixed and variable cost components, might complicate the costing procedure. The idea of the “relevant range” is useful in this situation since its understanding contributes to managers’ making better pricing decisions. Thus, the following analysis challenges to reveal the applicable range notion, its significance in costing decisions, particularly for companies with mixed costs, and its effects on profitability and competitiveness.

The range of activity levels where cost behavior is reasonably anticipated is the relevant range. To put it another way, this is the range of production or sales levels where the cost structure stays the same (Anderson & Leese, 2016, p. 88). Managers should comprehend the pertinent range because it enables them to make better selections regarding cost management and price strategy. The restaurant that has mixed costs for its overhead expenses serves as an illustration of the relevant range. The business has a $5,000 regular monthly rent as well as varying costs for utilities, materials for cleaning, and ingredients. The number of patrons the restaurant serves each month is the relevant range. For instance, the restaurant may manage its expenses appropriately and prevent overspending on overhead costs if it is aware that its relevant range is between serving 2,000 and 3,000 people per month. Businesses with a mix of fixed and variable costs should pay particular attention to the applicable range. Costs that are fixed do not change based on volume of production or sales, as exemplified by rent, insurance, and salary. Contrarily, variable costs change according to the volume of production or sales, and might cover labor, commissions, and raw supplies. Mixed costs are more difficult to classify since they contain components of both fixed and variable expenses.

Telephone bills, utility bills, and equipment depreciation are a few examples of mixed costs. Due to the fact that they react differently depending on the level of activity, these expenses are split from the fixed and variable cost components. The upkeep of a company’s machinery is one example of a mixed cost. Regular maintenance expenditures like cleaning and oil changes would fall under the fixed cost component, but costs for repairs or part replacements that depend on how much the equipment is used would fall under the variable cost component. The organization would be able to decide on the most economical level of equipment maintenance and plan for prospective repair expenses based on usage levels if these costs were separated. Separating mixed costs is crucial because it allows businesses to make informed decisions when it comes to pricing and cost management (Fülöp et al., 2021, p. 220). When a company understands its relevant range and the components of its mixed costs, it can determine the most cost-effective production or sales levels. The organization can also price its products or services appropriately, taking into account the variable and fixed cost components that promise to enhance profitability and competitiveness in the market.

Consequently, the applicable range notion is crucial, especially for organizations with a variety of expenses in costing decisions. It enables managers to make wise choices about pricing and cost management, which improves profitability and competitiveness. In order to achieve this, separating mixed costs is an obligatory step, and doing so requires an understanding of how costs behave within the relevant range. Businesses with a competitive edge in the market are likely to spend the time to examine their expenses and comprehend the notion of the pertinent range.

By analyzing the behavior of costs within the relevant range and separating the fixed and variable cost components, businesses can determine the most cost-effective production or sales levels and price their products or services appropriately. Ultimately, businesses that take the time to understand the relevant range and analyze their costs are likely to have a competitive edge in the market.

References

Anderson, J. A., & Leese, W. R. (2016). A formula for the units to satisfy an operation’s desired rate of return in CVP analysis – a conceptual approach. American Journal of Business Education (AJBE), 9(2), 87–100. https://doi.org/10.19030/ajbe.v9i2.9639

Fülöp, Á.-Z., Bakó, K.-E., & Stanciu, A. (2021). Separation of fixed and variable costs from mixed costs at a water and sewerage operator. The Annals of the University of Oradea. Economic Sciences, 30(30 (1)), 220–226. https://doi.org/10.47535/1991auoes30(1)024