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Clearbell Telephone provides slow-dialing (SD) service to

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Clearbell Telephone provides slow-dialing (SD) service to [#permalink] New post 02 Jul 2006, 21:54
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Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

(A) The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.
(B) The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year.
(C) Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.
(D) The company's competitors generally provide business customers with FD service at low-fee rates.
(E) Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.

can anyone explain this one??
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Re: CR : FD vs SD [#permalink] New post 02 Jul 2006, 22:42
Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

(A) The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.

=======> BINGO!!!!! This is the answer. This means extra cost of maintaining the SD is compensated by the higher fee of FD plus they are also getting some profit after compensating the SD. So moving everybody to SD will be a loss.

(B) The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year.

=======> This does not mean that putting everybody on the SD will be a loss.

(C) Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.

=======> Out of scope. We are not concerned about the reliability.

(D) The company's competitors generally provide business customers with FD service at low-fee rates.

=======> Out of scope. To hell with competition.


(E) Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.

=======> This is the result. We want the reason.

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Re: CR : FD vs SD [#permalink] New post 03 Jul 2006, 00:18
ps_dahiya wrote:
Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

(A) The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.

=======> BINGO!!!!! This is the answer. This means extra cost of maintaining the SD is compensated by the higher fee of FD plus they are also getting some profit after compensating the SD. So moving everybody to SD will be a loss.

(B) The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year.

=======> This does not mean that putting everybody on the SD will be a loss.

(C) Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.

=======> Out of scope. We are not concerned about the reliability.

(D) The company's competitors generally provide business customers with FD service at low-fee rates.

=======> Out of scope. To hell with competition.


(E) Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.

=======> This is the result. We want the reason.



Please see the bolded parts.
The accountants are vary of moving everybody to FD not SD.

I am also inclined towards A.
A states that FD connection yields extra revenue greater than installation of SD service.

Since the question stem says that installation costs for changing SD to FD for existing cutomers is neglible, the revenue gather by existing SD connections will be lost as a result of efficient FD connections, as neither fee will be high nor installation costs are high.
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 [#permalink] New post 03 Jul 2006, 00:53
What is the OA?

I am not sure about A; I am pretty lost from what A is trying to say.

Extra revenue from FD > cost of maintenance on SD. So if everyone is switched to FD, the company is only making more money because average per call FD costs less than SD. So it doesn't make sense that switching to FD will lower the profit unless: no customers will choose FD because FD is charged at a higher rate. So if Clearbell only has FD service at a higher rate, customers might as well not use it and Clearbell won't earn any money. As in C it says less than 10% customers will select FD.

So it is like this:
FD cost is $1 and charges customer at $6
SD cost is $2 and charges customer at $4

lets say right now there are x% of customers using SD and (100-x)% using FD, the profit is (4-2)*x% * Total amount of customers + (6-1) * (100-x)% * Total amount of customers.

If Clearbell switches to FD only, less than 10% of customer will use FD, so the profit is (4-2)*9.99% at maximum., which is definitely smaller than above.

Hence, I chose C.
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Re: CR : FD vs SD [#permalink] New post 03 Jul 2006, 14:35
jaynayak wrote:
ps_dahiya wrote:
Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

(A) The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.

=======> BINGO!!!!! This is the answer. This means extra cost of maintaining the SD is compensated by the higher fee of FD plus they are also getting some profit after compensating the SD. So moving everybody to SD will be a loss.

(B) The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year.

=======> This does not mean that putting everybody on the SD will be a loss.

(C) Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.

=======> Out of scope. We are not concerned about the reliability.

(D) The company's competitors generally provide business customers with FD service at low-fee rates.

=======> Out of scope. To hell with competition.


(E) Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.

=======> This is the result. We want the reason.



Please see the bolded parts.
The accountants are vary of moving everybody to FD not SD.

I am also inclined towards A.
A states that FD connection yields extra revenue greater than installation of SD service.

Since the question stem says that installation costs for changing SD to FD for existing cutomers is neglible, the revenue gather by existing SD connections will be lost as a result of efficient FD connections, as neither fee will be high nor installation costs are high.


That was a typo, I mean FD not SD.
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 [#permalink] New post 03 Jul 2006, 18:15
C. tough one.
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 [#permalink] New post 03 Jul 2006, 19:20
OA is "A"

Thanks
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  [#permalink] 03 Jul 2006, 19:20
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