Final answer:
True, as the contribution margin increases, the break-even point decreases since fewer units are required to cover fixed costs. Firms operating below the break-even point should choose the option that minimizes losses, and price changes must be balanced against quantity sold to optimize revenue.
Step-by-step explanation:
The statement 'As the contribution margin rises, the break-even point goes down' is true. The contribution margin is the difference between the sales price of a product and its variable costs. When the contribution margin increases, it means that each unit sold contributes more to covering the fixed costs. Therefore, fewer units need to be sold to reach the break-even point, where total revenues exactly match the total costs, leading to neither profit nor loss.
In the scenario where a firm is operating below the break-even point, it faces the decision to either continue producing at a loss or to shut down. The preferable option would be the one that minimizes the losses. If the price covers the average variable costs, it still contributes to fixed costs even if it doesn't cover the full average cost, so continuing production could be the better option rather than shutting down which would lead to the loss of the entire fixed cost.
The relationship between price and quantity also affects the firm's total revenue (P x Q). If a percentage rise in price is not offset by a substantially larger percentage fall in quantity sold, then total revenue could still increase. Conversely, if the price increase leads to a substantial decrease in the quantity sold, total revenue will fall. Firms need to understand these dynamics to set prices that optimize revenue and contribute to reaching the break-even point more efficiently.