ACCA Performance Management (F5) Certification Practice Exam

What financial aspect does contribution include?

1. Only variable costs

2. Profit and fixed costs

3. Sales and marketing expenses

4. Investments and dividends

The correct answer is: Profit and fixed costs

Contribution fundamentally refers to the amount available to cover fixed costs and generate profit after variable costs have been deducted from sales revenue. It is calculated as sales revenue minus variable costs, emphasizing the portion of sales that contributes towards covering fixed costs and ultimately profit. While the notion of profit and fixed costs might initially seem unconventional, it is important to clarify that the contribution margin is directly tied to covering fixed costs and thereafter contributing to profits. This relationship forms the backbone of operating decisions, revealing how much money is left over to address fixed expenses once variable costs have been accounted for. In contrast, options focusing solely on variable costs or on sales and marketing expenses do not encapsulate the comprehensive nature of contribution. Similarly, investments and dividends are financial aspects not directly related to the operational analysis provided by contribution; they pertain to broader financial positioning and shareholder returns rather than the internal profitability framework. Thus, the accurate understanding of contribution includes its vital role in covering fixed costs and ultimately leading to profit.