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Companies considering new cost-cutting manufacturing [#permalink]
16 Feb 2005, 22:03
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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.
Considering all are valid:
(D) has the most serious effect. If there's no market, then there is no way to recoup the investment.
(A), (B), (C), and (E) all state problems with time to recoup, but market share is available.
By assuming market share remain constant, the companies using this method of comparison will not be able to react sufficiently in the event their market is taken away by competitors.