What is Relevant Range of Operations?

//What is Relevant Range of Operations?
What is Relevant Range of Operations? 2017-10-10T03:32:33+00:00

Definition: The relevant range of operations is the normal or average scope of business activities. In the other words, the relevant range of operations is the average volume of sales and production that a business experiences outside of extreme economic prosperity and depression.

What Does Relevant Range of Operations Mean?

The average range of business activity is relevant to management for decision-making. Management can base its plans on the average range of operations because it’s consistent. It would be difficult for management to plan for production volumes based on a future depression or future speculated prosperity. Management can however predict production and sales volumes based on the average range of business operations. That is why this range of operations is considered relevant.

Example

Business managers can estimate variable costs and fixed costs for productions levels in a relevant range. For instance, production levels between 200-800 units might have consistent fixed and variable cost structures. After 800 units are produced, workers salaries increase and bonuses are paid. Thus, the cost structure for producing units changes. When the company produces less than 200 units, no workers are needed and the automated production process can be used exclusively. This is often called a step-wise cost structure.

As you can see, the average production output is somewhere between 200-800 units. Management can estimate and plan for production levels within this range. Anything outside of the relevant range, management does not actively use for planning purposes because it is unpredictable and can’t be used for estimates in most cases.