Question

Frisco Corporation is analyzing its fixed and variable costs within its current relevant range. As its cost driver activity changes within the relevant range, which of the following statements is/are correct?

I. As the cost driver level increases, total fixed cost remains unchanged.

II. As the cost driver level increases, unit fixed cost increases. III. As the cost driver level decreases, unit variable cost decreases.

1. I, II, and III are correct.

2. I and II only are correct.

3. I only is correct.

4. II and III only are correct.

Answer 1

Relevant range

Solution

Relevant range is the band or range of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question.

Total fixed cost remains unchanged but until a level of activity. For example, exhibit 2.4 shows how annual fixed costs behave at different levels of miles of hauling. Hence fixed costs remain unchanged in a relevant range.

As the cost driver level increases, unit fixed cost decreases. For example, if for 1 to 10 products, fixed cost is $ 100, then for 1 product fixed cost per unit is $ 100 / 1 = $ 100, for 2 products, unit fixed cost will be $ 100 / 2 = $ 50 and so on.

As the cost driver level decreases, unit variable cost remains unchanged. For example, if a vendor is providing a raw material for $ 1 per unit till 100 units, the unit variable cost in a range will be the same.

Hence, I only is correct.