Final answer:
A negative contribution margin at Ferry Company means their selling price is less than the variable costs per unit, which is the true statement among the provided options. Continued production in this scenario leads to greater losses, and the firm should consider shutting down to minimize those losses.
Step-by-step explanation:
If Ferry Company calculates its contribution margin to be less than zero, it indicates that the selling price per unit is less than the variable cost per unit. This means that for every unit sold, the company actually loses money, as the price does not cover the variable costs incurred to produce and sell that unit. Therefore, of the given options, the true statement is that the selling price is less than variable costs.
Fixed costs do not vary with the level of output and are not typically affected by the amount the company sells in the short run. Thus, even if the fixed costs are less than the variable cost per unit, it's the relationship between selling price and variable costs that directly impacts the contribution margin.
If the company continues to sell more units at a price that is less than the variable costs, it will continue to incur greater losses. Hence, selling more units is not advisable when the contribution margin is negative. As for profits, if the contribution margin is negative, it suggests that the total costs (variable plus fixed) exceed the revenue, resulting in losses, not profits.
According to the shutdown point principle, if the price is lower than the minimum average variable cost, the firm would be better off shutting down because it would minimize losses. It's not beneficial to keep producing and selling at a loss. The better decision between producing at a loss and shutdown would be the one that results in smaller losses.