What do target profit points calculate in relation to fixed expenses?

The calculation of target profit points is essential for businesses to understand how their fixed expenses, target profits, and contribution margins interact. The correct answer involves determining how many units must be sold to cover both fixed expenses and achieve a specific profit level.

When we look at option B, it states that target profit points equal the fixed expenses plus the target profit divided by the contribution margin. This is accurate because the contribution margin represents the amount of revenue that remains after variable costs are subtracted. Essentially, it contributes to covering the fixed expenses and achieving profit.

To break this down:

1. Fixed Expenses are the costs that do not change with the level of production or sales, such as rent, salaries, and insurance.

2. Target Profit is the desired level of income that a business wants to achieve beyond covering its expenses.

3. Contribution Margin is calculated as sales revenue minus variable costs, indicating how much revenue contributes to covering the fixed costs and profit after covering variable costs.

Thus, by summing fixed expenses and the desired profit, and then dividing by the contribution margin, a business can determine the sales needed to reach both the cost coverage and profit objectives. This formula allows a business to assess how changes in sales volume