Short-Term Decision-Making

1. Using the data in Note 5.21 "Review Problem 5.5", identify the relevant range.
2. Why is it important to determine the relevant range?

Solution to Review Problem 5.8

1. The relevant range, the range of activity for which cost estimates are more likely to be accurate, is from 150 units (lowest activity level) to 450 units of production (highest activity level).
2. Identifying the relevant range when estimating costs is important because if a cost estimate is being made for activity outside of the relevant range, total fixed costs and per unit variable costs may be different from those described in the cost equation. For example, if production is doubled, additional factory space may be needed, resulting in higher fixed costs.