Question

Kozy Enterprises is considering manufacturing a new product. It projects the cost of direct materials and rent for a range of output as shown below: Output in Units 1,000 2,000 3,000 4,000 5.000 6,000 7,000 8,000 9.000 10,000 11,000 12,000 Rent Expense $5,000 5.000 5,000 7,000 7,000 7,000 7,000 7,000 7,000 10,000 10,000 10,000 Direct Materials $ 4,000 6,000 7,800 8,000 10,000 12,000 14,000 16,000 18,000 23.000 28.000 36,000

Answer 1

Relevant Range of activity 4000 to 9000

Variable cost per unit within range is $2 per unit

Fixed cost with relevant range is $7000

Please refer below Working for better understanding

Working and Explanation

Relevant range is the relevant volume or activity at which company is expected to operate.

Withing relevant range , Fixed cost is fixed only to the relevant range , and variable cost changes in same proportion of volume but gradually decrease if goes below relevant range or increase is it goes outside the relevant range or vise versa.

Output	Fixed Cost ( Rent )	Direct Material	Variable cost per output ( Direct Material
1000	$5000	$4000	$4000/1000=$4
2000	$5000	$6000	$6000/2000=$3
3000	$5000	$7800	$7800/3000=$2.6
4000	$7000	$8000	8000/4000=$2
5000	$7000	$10000	10000/4000=$2
6000	$7000	$12000	12000/4000=$2
7000	$7000	$14000	14000/7000=$2
8000	$7000	$16000	16000/8000=$2
9000	$7000	$18000	18000/9000=$2
10000	$1000	$23000	23000/10000=$2.3
11000	$1000	$28000	28000/11000=$2.5454
12000	$1000	$36000	36000/12000=$3

Hence we can see from the table the relevant range of activity is 4000 to 9000 as the variable cost per unit at this range changes with the level of change in unit and became constant at this range , if any unit increase or decrease from this range variable cost will start decreasing and increasing .