1) Companies considering new cost-cutting manufacturing : GMAT Critical Reasoning (CR)
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# 1) Companies considering new cost-cutting manufacturing

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1) Companies considering new cost-cutting manufacturing [#permalink]

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13 Jul 2007, 22:19
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1) Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.
Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?
(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

What is the answer? And how do you arrive at it? Please explain. Thanks.
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13 Jul 2007, 23:08
Sita wrote:
1) Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.
Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?
(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

What is the answer? And how do you arrive at it? Please explain. Thanks.

Sita, the whole point of investment and not investment is one and only one. Making money work for the company. That means that if there is not apparent advantage, the companies would rather keep the money in the bank. If a competitor is taking the market share because it has invested in the new technology, the company is not really saving any money. It is loosing the already invested money. The criteria is that the selling price and the market share should remain constant, but it doesn't in this case.

So, D should be the answer.
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13 Jul 2007, 23:28
sorry for this post. please ignore.
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for every person who doesn't try because he is
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14 Jul 2007, 13:39
Sita wrote:
1) Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.
Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?
(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

What is the answer? And how do you arrive at it? Please explain. Thanks.

What can cause the most serious disadvantage for companies using the method above for evaluating the financial benefit of new manufacturing processes?

a situation where companies which has already adopted such method will be unable to analyse correctly.

B: It talks abt future scenario of loan market....not relevent in terms of
this ques.
C. It suggest abt a future problem which isn't related to question stem.
might require heavy investment was never a consideration.
D. Irrelevent in he context of this problem. even comptiors had adopted
that method.
E. Again abt a problem which doesn't agree wih question stem.

Now A: making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.

When cost is uncertain this will attack the very basis of analsys......the biggest disadvantage.
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14 Jul 2007, 20:00
shoonya wrote:
Sita wrote:
1) Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.
Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?
(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

What is the answer? And how do you arrive at it? Please explain. Thanks.

Sita, the whole point of investment and not investment is one and only one. Making money work for the company. That means that if there is not apparent advantage, the companies would rather keep the money in the bank. If a competitor is taking the market share because it has invested in the new technology, the company is not really saving any money. It is loosing the already invested money. The criteria is that the selling price and the market share should remain constant, but it doesn't in this case.

So, D should be the answer.

Agree with shoonya...D offers an alternative point that can hurt the company.
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14 Jul 2007, 20:21
Sita,

First look at the assumption made in the desicion making process.
Here costs, selling prices, and share of market are assumed to be constant.
Any change in these values will result in change in the outcome(s) of the decision.
If competitor will reduce the selling price and take away the market share then it's the loss for the companies using mentioned method to make desicion about future investment.

So D is the right choice.

- Brajesh
14 Jul 2007, 20:21
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