Skip to main content
Sign in Create a free account
Varsity Tutors
Sign in

Relevant Range & Step Costs - Managerial Accounting

  1. Manufacturing Corp operates within a relevant range of 8,000 to 12,000 units per month. At 10,000 units, total costs are $180,000 (variable costs of $120,000 and fixed costs of $60,000). The company is considering a special order that would increase production to 13,500 units. Which statement best describes the cost behavior implications?
    Answer: Variable cost per unit will remain $12, but total fixed costs may increase due to exceeding relevant range capacity constraints Variable cost per unit is $12 ($120,000 ÷ 10,000 units) and typically remains constant per unit even outside the relevant range. However, exceeding the relevant range (13,500 > 12,000) may require additional fixed costs like equipment, supervision, or facility expansion. Choice B incorrectly assumes variable costs per unit change. Choice C ignores that exceeding relevant range limits affects cost behavior regardless of duration. Choice D incorrectly applies relevant range relationships to production levels outside that range (13,500 × $18 = $243,000 assumes same cost structure).
  2. Gamma Industries operates with step-fixed costs for its security department: $25,000 for 0-8,000 square feet, $50,000 for 8,001-16,000 square feet, and $75,000 for 16,001-24,000 square feet. Currently using 14,500 square feet with a relevant range of 12,000-18,000 square feet. Management is considering two options: expand to 22,000 square feet or contract to 7,500 square feet. Which statement best analyzes these alternatives?
    Answer: Expansion increases costs by $25,000 outside relevant range; contraction decreases costs by $25,000 outside relevant range Current costs at 14,500 sq ft: $50,000. Expansion to 22,000 sq ft: $75,000 (increase of $25,000), but 22,000 > 18,000 so outside relevant range. Contraction to 7,500 sq ft: $25,000 (decrease of $25,000), but 7,500 < 12,000 so outside relevant range. Both alternatives fall outside the 12,000-18,000 relevant range. Choice A incorrectly places expansion within relevant range. Choice B incorrectly places expansion within relevant range. Choice D correctly identifies both outside relevant range but incorrectly suggests this makes analysis impossible rather than noting the specific cost changes.
  3. Alpha Manufacturing's quality control department exhibits step-variable cost behavior with inspectors assigned as follows: 1 inspector per 1,000 units (0-1,000 units), 2 inspectors per 2,000 units (1,001-2,000 units), etc. Each inspector costs $4,000 monthly. Currently producing 3,400 units with plans to reduce to 2,800 units next month. If the relevant range is defined as 2,500-4,500 units, what cost behavior change occurs?
    Answer: Step cost decreases by $4,000 while remaining within the relevant range for cost prediction reliability When analyzing step-variable costs, you need to understand that these costs remain constant within specific activity ranges but jump to new levels when volume crosses certain thresholds. Unlike true variable costs that change smoothly with volume, step costs create a stair-step pattern. Let's work through this scenario systematically. At 3,400 units, Alpha needs 4 inspectors (since each handles up to 1,000 units: 0-1,000 needs 1, 1,001-2,000 needs 2, 2,001-3,000 needs 3, and 3,001-4,000 needs 4). This creates a monthly cost of 4×$4,000=$16,0004 \times \$4,000 = \$16,000. When production drops to 2,800 units, only 3 inspectors are needed, reducing costs to 3×$4,000=$12,0003 \times \$4,000 = \$12,000. The step cost decreases by $4,000. Crucially, both activity levels (3,400 and 2,800 units) fall within the stated relevant range of 2,500-4,500 units, meaning cost behavior patterns remain predictable and reliable for managerial planning. Answer A incorrectly treats this as variable cost behavior when it's clearly step-variable. Answer B misses the step change entirely—even within a relevant range, step costs can change when crossing thresholds. Answer C correctly identifies the $4,000 decrease but wrongly claims the change moves outside the relevant range; 2,800 units clearly falls within 2,500-4,500 units. Remember: step-variable costs can change within a relevant range when crossing activity thresholds. The relevant range defines where your cost behavior assumptions remain valid, not where costs must stay constant.
  4. Beta Corp's maintenance department uses a step cost structure where costs remain fixed at $80,000 for production levels up to 4,000 units, then jump to $120,000 for 4,001-7,000 units, and $160,000 for 7,001-10,000 units. The company currently produces 6,200 units within a relevant range of 5,500-8,500 units. A potential contract would reduce production to 3,200 units. What are the cost implications of accepting this contract?
    Answer: Maintenance costs decrease by $40,000, and the new production level falls outside the established relevant range When you encounter step cost problems, focus on two key elements: identifying which cost level applies at different production volumes and determining whether the analysis falls within the relevant range where cost behavior is predictable. At 6,200 units, Beta Corp operates in the 4,001-7,000 unit range with maintenance costs of $120,000. If production drops to 3,200 units, it falls into the up-to-4,000 unit range where costs are $80,000. This creates a cost decrease of $40,000 ($120,000 - $80,000). The relevant range of 5,500-8,500 units represents the activity level where management has confidence in cost behavior patterns. Since 3,200 units falls well below this range, cost predictions become less reliable. Answer A incorrectly states total savings of $80,000 (the actual savings is $40,000) and wrongly claims the analysis stays within the relevant range. Answer B reflects the misconception that step costs are "sticky downward" - while some costs resist decreases in the short term, step costs by definition change at specific volume thresholds. Answer C correctly identifies the $40,000 decrease and relevant range issue but focuses on unreliable cost behavior rather than the fact that the new level simply falls outside the established range. Answer D correctly captures both the $40,000 cost reduction and explicitly states that 3,200 units falls outside the relevant range. Study tip: Step cost problems often test whether you can calculate the cost change AND recognize relevant range limitations. Always check if the new activity level falls within management's established confidence interval for cost predictions.
  5. Zeta Manufacturing operates with multiple step cost functions. Supervision costs are $40,000 for 0-2,000 units, $70,000 for 2,001-4,000 units, and $100,000 for 4,001-6,000 units. Equipment maintenance follows a different step pattern: $20,000 for 0-3,000 units and $35,000 for 3,001-6,000 units. Current production is 3,200 units within a relevant range of 2,800-4,200 units. If production increases to 4,300 units, what will be the combined step cost increase?
    Answer: $30,000 increase total, with supervision stepping up while maintenance costs remain unchanged from current levels Step cost functions create plateaus where costs remain constant within specific activity ranges, then jump to a new level when crossing thresholds. When analyzing multiple step cost functions, you need to track each cost component separately and identify which thresholds are crossed. Let's trace through both cost functions. At current production of 3,200 units, supervision costs are $70,000 (in the 2,001-4,000 range) and maintenance costs are $35,000 (in the 3,001-6,000 range). When production increases to 4,300 units, supervision steps up to $100,000 (entering the 4,001-6,000 range), creating a $30,000 increase. Maintenance costs remain at $35,000 since 4,300 units still falls within the 3,001-6,000 range. The total step cost increase is $30,000. Choice A incorrectly suggests maintenance costs "already stepped up at current production level," but maintenance actually stepped up when production exceeded 3,000 units, not at the current 3,200 level. Choice C wrongly assumes both cost functions step up simultaneously at 4,300 units, but maintenance doesn't have another step until after 6,000 units. Choice D reverses the situation entirely, claiming only maintenance increases when actually only supervision increases. Study tip: With multiple step cost functions, always map out where you are now versus where you're going for each cost component separately. Draw the step patterns if needed—visual representation helps prevent mixing up which costs step at which activity levels.
  6. TechCorp's IT support department has a step-fixed cost structure where one technician can support up to 150 employees. The company currently employs 425 people and pays each technician $65,000 annually. If TechCorp plans to hire 80 new employees over the next year, what will be the total change in IT support costs, and what is the relevant range for the current staffing level?
    Answer: Cost increase of $65,000; relevant range is 301-450 employees Currently with 425 employees, TechCorp needs 3 technicians (425 ÷ 150 = 2.83, rounded up to 3). After hiring 80 employees (425 + 80 = 505), they'll need 4 technicians (505 ÷ 150 = 3.37, rounded up to 4). The cost increase is $65,000 (1 additional technician). The current relevant range with 3 technicians is 301-450 employees (3 × 150 = 450 max, previous step was 2 × 150 = 300, so range is 301-450). Choice B incorrectly calculates 2 additional technicians and uses the future range. Choice C has the correct cost but uses the future relevant range. Choice D has incorrect cost and correct current range.
  7. Based on the projected call volumes, what is the most likely scenario for call center costs over the three-month period?
    Answer: Costs will decrease to $225,000 in Month 1, stay at $270,000 in Month 2, then increase to $315,000 in Month 3 Month 1: 12,200 calls ÷ 2,500 = 4.88, so 5 centers needed ($225,000). Month 2: 14,600 calls ÷ 2,500 = 5.84, so 6 centers needed ($270,000). Month 3: 16,100 calls ÷ 2,500 = 6.44, so 7 centers needed ($315,000). Choice A correctly identifies the pattern but doesn't specify costs. Choice B ignores that step costs can decrease when volume drops significantly. Choice D incorrectly treats these as variable rather than step costs. The key is recognizing that step costs can move both up and down as volume changes cross step boundaries.
  8. If Delta experiences a seasonal surge to 2,100 shipments next month followed by a drop to 1,150 shipments the month after, what will be the total supervisor cost change over this two-month period compared to current levels?
    Answer: No net change in supervisor costs since the company returns to the original step level Current (980 shipments): 2 supervisors = $12,000. Month 1 (2,100 shipments): 4 supervisors = $24,000. Month 2 (1,150 shipments): 2 supervisors = $12,000. Net change over two months: $12,000 - $12,000 = $0. The question asks for total change over the period compared to current levels, not month-to-month changes. Choice A incorrectly assumes sustained increase. Choice C provides monthly changes rather than net change over the period. Choice D incorrectly calculates net change and unnecessarily references relevant range constraints.
  9. Epsilon Corp's training department follows a step cost pattern where training capacity and costs are: Level A (0-50 employees): $15,000 quarterly; Level B (51-120 employees): $30,000 quarterly; Level C (121-200 employees): $45,000 quarterly. Currently training 85 employees quarterly with a relevant range of 70-130 employees. Due to restructuring, the company will train 45 employees next quarter and 135 employees the quarter after. What is the most significant managerial accounting concern?
    Answer: Cost behavior predictions become unreliable for both quarters since volumes fall outside established relevant range Current (85 employees): Level B = $30,000. Next quarter (45 employees): Level A = $15,000 (below relevant range of 70-130). Following quarter (135 employees): Level C = $45,000 (above relevant range of 70-130). Both quarters fall outside the relevant range, making cost behavior predictions unreliable. Choice A focuses on cost increase but misses the relevant range issue. Choice B discusses efficiency but isn't the most significant accounting concern. Choice D mentions volatility but doesn't address the critical relevant range implications for cost behavior analysis.

Start this quiz