Range of activity for deciding cost behaviour
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Why is it necessary for a company to specify a relevant range of activity when making assumptions about cost behavior?
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Solution Summary
This solution explains what is necessary for a company to specify a relevant range of activity when making assumptions about cost behavior. Additionally, this solution provides a detailed example to better illustrate the topic.
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Answer
Cost behavior often changes outside of the relevant range of activity due to a change in the fixed costs. When volume increases to a certain point, more fixed costs will have to be added. When volume shrinks significantly, some fixed costs could be eliminated.
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