ACCA Performance Management (F5) Certification Practice Exam

How is contribution defined?

1. Sales price - Total cost

2. Sales price - Fixed cost

3. Sales price - Variable cost

4. Sales price + Variable cost

The correct answer is: Sales price - Variable cost

Contribution is defined as the amount remaining from sales revenue after variable costs have been deducted. This means that contribution can be calculated by subtracting variable costs from sales price. The result is used to cover fixed costs and contribute to profit. In a typical analysis, understanding contribution is crucial because it helps businesses identify how much revenue from sales can be allocated towards covering the fixed costs. After all fixed costs are paid, the remaining contribution is the profit. Therefore, the correct understanding of contribution takes into account only the variable costs, which are directly affected by the levels of production and sales. The other options misrepresent the calculation. For instance, subtracting total costs, which include both fixed and variable costs, would not isolate the contribution. Similarly, subtracting fixed costs or adding variable costs to sales price does not align with the standard contribution margin definition, as they do not accurately reflect the relationship needed to assess the profitability of sales.