ACCA Performance Management (F5) Certification Practice Exam

What formula determines the level of activity needed to earn a required profit?

1. Fixed costs / Contribution per unit

2. Required profit + Fixed costs / Contribution per unit

3. Sales - Variable costs

4. Contribution - Fixed costs

The correct answer is: Required profit + Fixed costs / Contribution per unit

The formula that determines the level of activity needed to earn a required profit takes into account both the fixed costs and the required profit, allowing for a comprehensive understanding of what must be achieved in terms of contribution. To earn a specific required profit, one must first sum the fixed costs with that profit, which reflects the total amount that needs to be covered by contribution. The contribution per unit, which is the selling price per unit minus the variable cost per unit, indicates how much each unit sold contributes to covering fixed costs and generating profit. By dividing the total of fixed costs plus required profit by the contribution per unit, you accurately calculate the number of units that need to be sold to achieve that profit target. This approach effectively connects all relevant factors—fixed costs, required profit, and contribution, making it a fundamental formula used in break-even and profit planning analysis. The other options either do not consider both fixed costs and required profit together or focus on different aspects of cost and revenue without directly determining the necessary activity level to reach a designated profit level.