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Companies considering new cost-cutting manufacturing

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Senior Manager
Senior Manager
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Joined: 19 Oct 2010
Posts: 274
Location: India
GMAT 1: 560 Q36 V31
GPA: 3
Followers: 6

Kudos [?]: 35 [0], given: 27

Companies considering new cost-cutting manufacturing [#permalink] New post 07 Apr 2011, 11:26
00:00
A
B
C
D
E

Difficulty:

  75% (hard)

Question Stats:

29% (03:37) correct 71% (02:30) wrong based on 7 sessions
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.

Please help with this.
[Reveal] Spoiler: OA

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petrifiedbutstanding

Director
Director
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Status: Matriculating
Affiliations: Chicago Booth Class of 2015
Joined: 03 Feb 2011
Posts: 931
Followers: 11

Kudos [?]: 196 [0], given: 123

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Re: Cost Cutting [#permalink] New post 07 Apr 2011, 12:22
(A) The costs of materials required by the new process
might not be known with certainty. --cost is taken constant. Hence no bearing on the argument

(B) In several years interest rates might go down,
reducing the interest costs of borrowing money to
pay for the investment. -- this will help the strategy. Hence 180 deg wrong choice. We need a weakener.

(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. --- this will help the strategy. We need a weakener.

(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. -- this definitely weakens the argument. suppose the company does not employ the strategy there is a possibility that it may loose the market share to the competitors, who will use the new strategy, lower the selling prices and thus hog the market

(E) The period of year chosen for averaging out the cost
of the investment might be somewhat longer or
shorter, thus affecting the result. -- this is irrelevant to the argument.

Hence D.
Senior Manager
Senior Manager
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Joined: 12 Oct 2009
Posts: 272
Schools: Columbia, INSEAD, RSM, LBS
Followers: 2

Kudos [?]: 33 [0], given: 4

Re: Cost Cutting [#permalink] New post 07 Apr 2011, 17:08
D
Re: Cost Cutting   [#permalink] 07 Apr 2011, 17:08
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