Final answer:
The correct formula for target units is (total fixed costs + target profit) ÷ unit contribution margin, which is used by businesses to determine how many units they need to sell to cover fixed costs and reach profitability.
Step-by-step explanation:
The correct formula for calculating the target units to achieve a certain profit level in a business context is (total fixed costs + target profit) ÷ unit contribution margin. This formula helps businesses understand how many units need to be sold to cover all fixed costs and achieve desired profit goals. The contribution margin ratio is not used in this formula; instead, the unit contribution margin, which is the amount by which the sale of one unit contributes to the fixed costs and profit, is utilized.
Contribution margin is a key concept in cost accounting that allows firms to make informed decisions about pricing, production levels, and profit planning. This formula assumes that the unit contribution margin remains constant across the target units produced and that the fixed costs do not change with the level of output within the relevant range.
Understanding this formula is essential for a firm to make strategic business decisions regarding output levels and pricing strategies to meet both short-term and long-term financial objectives.