ACCA Performance Management (F5) Certification Practice Exam

What do you need to determine the sales revenue required to earn a target profit?

1. Target profit + Variable costs / C/S ratio

2. Required profit + Fixed costs / C/S ratio

3. Fixed costs / Target profit

4. Contribution + Fixed costs / Sales price

The correct answer is: Required profit + Fixed costs / C/S ratio

To determine the sales revenue required to earn a target profit, it’s essential to accurately account for both the fixed costs and the contribution margin that is generated from sales. The correct approach involves adding the required profit to the fixed costs and then dividing this total by the contribution-to-sales (C/S) ratio. The contribution-to-sales ratio represents the proportion of each sales dollar that contributes to covering fixed costs and generating profit. Therefore, adding the required profit to fixed costs provides the total amount of money that must be generated to cover these expenses and achieve the target profit. Dividing this sum by the C/S ratio allows you to determine the necessary sales revenue. This method effectively links your profit goals with the underlying cost structure, providing a clear picture of the sales volume required to achieve desired financial outcomes. It is a practical application of the break-even and cost-volume-profit analysis, crucial for making informed business decisions regarding pricing, production levels, and sales strategies. In contrast, the other options do not accurately reflect the relationship between profit targets, fixed costs, and the means by which sales revenue is determined. For instance, options that suggest dividing fixed costs by the target profit or do not incorporate the C/S ratio into the calculation do not represent the complete methodology needed