2.3.2: Relevant Range

Relevant Range

Relevant range is the band or range of the amount or volume of something or the level of an activity in which there is a specific relationship between the volume or the level of an activity, i.e., the cost driver, and the cost in question. For example, a fixed cost is fixed only for a given range of volume or activity (at which the company is expected to operate) and only for a given time period (usually a particular budget period). Suppose Tesla contracts with Thomas Transport Company (TTC) to transport completed Model 3s from the Tesla Factory to Tesla service centers where customers can pick up their new vehicles. TTC rents two trucks, and each truck has an annual fixed rental cost of $40,000. The maximum annual usage of each truck is 120,000 miles. In the current year (2020), the predicted combined total hauling of the two trucks is 170,000 miles.

Exhibit 2-4 shows how annual fixed costs behave at different levels of miles of hauling. Up to 120,000 miles, TTC can operate with one truck; from 120,001 to 240,000 miles, it operates with two trucks; and from 240,001 to 360,000 miles, it operates with three trucks. This pattern will continue as TTC adds trucks to its fleet to provide more miles of hauling. Given the predicted 170,000-mile usage for 2020, the range from 120,001 to 240,000 miles hauled is the range in which TTC expects to operate, resulting in fixed rental costs of $80,000. Within this relevant range, changes in miles hauled will not affect the annual fixed costs.

A step graph shows the behavior of annual fixed costs at various levels of miles of hauling at Thomas Transport Company.

The Y-axis shows the total fixed costs ranging from 0 to 160000 dollars with an increment of 40000 dollars. The X-axis shows the miles of hauling ranging from 0 to 360000 with an increment of 120000.

The details of the graph are as follows:

The range from 0 to 120000 miles hauled results in the total fixed costs of $40000.
The range from 120000 to 240000 miles hauled, which is the relevant range in 2020, results in the total fixed costs of 80000 dollars.
The range from 240000 to 360000 miles hauled results in the total fixed costs of 120000 dollars.

Fixed costs may change from one year to the next, though. For example, if the total rental fee of the two trucks increases by $2,000 for 2021, the total level of fixed costs will increase to $82,000 (all else remaining the same). If that increase occurs, total rental costs will be fixed at this new level ($82,000) for 2021 for the miles hauled in the 120,001 to 240,000 range.

The relevant range also applies to variable costs. Outside the relevant range, variable costs, such as direct material costs, may no longer change proportionately with changes in the production volume. For example, above a certain volume, the cost of steering wheels may increase at a lower rate because Tesla may be able to negotiate price discounts for purchasing a greater number of steering wheels from its supplier.