Companies considering new cost-cutting manufacturing

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SVP

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Companies considering new cost-cutting manufacturing [#permalink]

30 Oct 2005, 13:33

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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.
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Director

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30 Oct 2005, 14:01

We have to find the answer that introduces a possibility that either reduces the expected results when making the investvent or increases the results when not making the investment.

A is irrelevant. B would not be a disadvantage but an advantage. C is irrelevant. E is irrelevant. Therefore D is the correct answer. If the market share of the company decreased, the expected results would be lower.

IMO D.

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30 Oct 2005, 14:18

I think it is A on this one.

They're asking which option would be the most damaging in the evaluation process. If you do not know future costs of materials, how can you make a proper comparison between the two options?

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31 Oct 2005, 21:18

I used the POE for this Q.
A - Out of scope. Argument does not talk of cost of materials.
B - Out of scope. Argument does not talk of interest rates.
C - Supports the process. That's how new process investment provide ROI.
D - Only one which in scope of the argument and correct.
E - Out of scope.We are not talking of the duration of ROI.

Hence D.

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01 Nov 2005, 16:00

OA is D.
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[#permalink] 01 Nov 2005, 16:00

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