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Companies considering new cost-cutting manufacturing

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Senior Manager
Joined: 19 Oct 2010
Posts: 271
Location: India
GMAT 1: 560 Q36 V31
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Kudos [?]: 64 [0], given: 27

Companies considering new cost-cutting manufacturing [#permalink]

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07 Apr 2011, 12:26
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Difficulty:

95% (hard)

Question Stats:

35% (03:01) correct 65% (02:19) wrong based on 33 sessions

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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.

[Reveal] Spoiler: OA

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petrifiedbutstanding

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Status: Impossible is not a fact. It's an opinion. It's a dare. Impossible is nothing.
Affiliations: University of Chicago Booth School of Business
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Re: Cost Cutting [#permalink]

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07 Apr 2011, 13:22
(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.
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Re: Cost Cutting [#permalink]

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07 Apr 2011, 18:08
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Re: Companies considering new cost-cutting manufacturing [#permalink]

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24 May 2016, 22:16
Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

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Re: Companies considering new cost-cutting manufacturing   [#permalink] 24 May 2016, 22:16
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