I met this question and I am totally confused by the way the answer is worked. The Break even point is derived at by dividing Total Contribution Margin by CM per composite unit. Answer choice D (10,500 units) was chosen as the best answer Why Total contribution margin and not Fixed cost divided by CM per composite unit? I chose B (6,000) because I used the Fixed cost formula.
Here is the question:
Wren Co. manufactures and sells two products with selling prices and variable costs as follows:
SELLING PRICE $18.00 $22.00
VARIABLE COSTS $12.00 $14.00
WREN'S TOTAL ANNUAL FIXED COSTS ARE $38,400. WREN SELLS FOUR UNITS OF A FOR EVERY UNIT OF B. IF OPERATING INCOME LAST YEAR WAS $28,800, WHAT WAS THE NUMBER OF UNITS WREN SOLD?
ANY HELP WOULD BE APPRECIATED! THANK YOU AND BE SAFE.
Using the fixed cost formula gives you the number of composite units that cause CM = FC, which means the operating income will be zero. However, the question said that the operating income last year was $28,800. Therefore, you need the contribution margin not only cover the fixed cost, but also generate additional $28,800 operating income. So the composite contribution margin should equal the sum of fixed cost and operating income. That's why we divide $67,200 by the CM.