ACCA Performance Management (F5) Certification Practice Exam

What does a high contribution/sales ratio indicate?

1. Higher fixed costs

2. Lower profitability

3. A greater proportion of sales contributes to covering fixed costs

4. A lower breakeven point

The correct answer is: A greater proportion of sales contributes to covering fixed costs

A high contribution/sales ratio indicates that a significant proportion of each unit sold contributes to covering the fixed costs of the business and generating profit once those fixed costs are covered. The contribution margin is calculated by taking sales revenue and subtracting variable costs, and the contribution/sales ratio is essentially the contribution margin expressed as a percentage of sales. When this ratio is high, it suggests that a larger percentage of sales revenue is available to cover fixed costs and to provide profit after those costs are accounted for. This is an essential insight for management, as a high contribution/sales ratio implies that the business can potentially achieve profitability with lower sales volumes. In contrast, a lower contribution/sales ratio would mean that less of each sales dollar goes towards covering fixed costs, making it more challenging for the business to reach profitability. Consequently, a high contribution/sales ratio not only provides a cushion for fixed costs but also allows the business to be more resilient to fluctuations in sales volume.