Question

. How does analyzing fixed and variable costs help you to set a sale price that will generate profit? 2. How is profit affected when a company produces outside it's "relevant range" (normal range of activity)? Explain?

Answer 1

1. Apart from helping to know the average cost of a product, analyzing fixed and variable cost will help to derive the break even point.

2. Profit will go down

Step-by-step explanation:

1. The size of the selling price and the variable cost determine contribution per unit of a product. Contribution per unit is Price minus variable cost. This shows the contribution of sales revenue towards covering the fixed cost of a product.

2. Relevant range is the estimated or budgeted activity level which defines a business volume of production or operation, it is both maximum and minimum threshold within which the entity must operate to expect certain level of cost and revenue.

Sometimes fixed costs are fixed within a relevant range of activities and outside such range, fixed cost may become variable, which will all things being equal impact negatively on the price.

Also, within relevant range volume discount may be achieved and outside such range, this may be forfeited which, will also reduce profit all things being equal.