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Companies considering new cost-cutting manufacturing proces

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Companies considering new cost-cutting manufacturing proces [#permalink] New post 20 May 2003, 07:17
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Question Stats:

25% (01:04) correct 75% (01:37) 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. ( First of all, do they mean the alternative variables do not change)
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 ouf new manufacturing processes?( Looking at this, I want to know what ETS wants from us??)

(A) The costs of materials required by the new process might not be known with certainty.( I understand this, this is what the model says--it is projected.)

(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.--- It claims that the method described can accomadate alternative investments - ( but I don't see how. They just,I think, project costs, selling price, and share of market remaining.)

(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. ( It projects costs, so it can accomodate it.)

I'll stop at D to make it short, according to ETS, this is the right answer.

(D) Competitors that do invest in a new process might reduce their selling prices and thus take make share away from companies that do not.

( According to ETS, this method would systematically tend to value the noninvestment option too highly. Shouldn't it be it values the investment option too highly but if that is the case the model might project this! How can this be the right choice?
Bottom line, just explain as much as you can, thanks dudes.
Joined: 31 Dec 1969
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CR Questioin [#permalink] New post 20 May 2003, 11:09
The answer is D, do you know why, any explanation is helpful since it is quite tough to understand the problem.
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Re: Tough CR Question [#permalink] New post 20 May 2003, 12:17
Expert's post
VTay25 wrote:
I will just list the question stem and correct answer, perhaps somebody's brain can decipher this tough logic.

Please provide explanation as I really don't know what ETS is up to here.

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. ( First of all, do they mean the alternative variables do not change)
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 ouf new manufacturing processes?( Looking at this, I want to know what ETS wants from us??)

(A) The costs of materials required by the new process might not be known with certainty.( I understand this, this is what the model says--it is projected.)

(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.--- It claims that the method described can accomadate alternative investments - ( but I don't see how. They just,I think, project costs, selling price, and share of market remaining.)

(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. ( It projects costs, so it can accomodate it.)

I'll stop at D to make it short, according to ETS, this is the right answer.

(D) Competitors that do invest in a new process might reduce their selling prices and thus take make share away from companies that do not.

( According to ETS, this method would systematically tend to value the noninvestment option too highly. Shouldn't it be it values the investment option too highly but if that is the case the model might project this! How can this be the right choice?
Bottom line, just explain as much as you can, thanks dudes.




Hey, don't post the answer so quickly; we have not had a chance to take a look at it... Guessing and being proven wrong is more fun than just seeing the answer. it is masochistic, what isn't on the GMAT?


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 [#permalink] New post 20 May 2003, 16:31
sorry i typed it wrong. i wanted to say answer.D
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 [#permalink] New post 20 May 2003, 17:19
u have to find the gap or flaw in the evidence or assumption made. the flaw is that -- the method assumes costs, selling prices, and share of market remain constant while not investing. this method will be a failure if the above things change.
a,b,c come under cost of investment which is taken into account while making an investment decision.
d is not taken into account which will make the method fail.

hope u understand.
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 [#permalink] New post 20 May 2003, 17:26
Expert's post
arun wrote:
u have to find the gap or flaw in the evidence or assumption made. the flaw is that -- the method assumes costs, selling prices, and share of market remain constant while not investing. this method will be a failure if the above things change.
a,b,c come under cost of investment which is taken into account while making an investment decision.
d is not taken into account which will make the method fail.

hope u understand.



YOu are absolutely right.

You are also right about D turning into a smiley since it is a colon with D.

The argument depends on the assumption that the market share of the company that makes choice to invest or not to invest depends only on its decision. Thus when tihs assumption is negated, the argument fails. The assumption is basically that the competitors will stay constant no matter what.


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Feedback to Arun and BB [#permalink] New post 20 May 2003, 19:27
I guess the model wants the selling price to remain constant for the noninvestor but it is possible the seller changes and that is why the model fails, right??

But, is it okay for the investor to project their market share?

Finally, why does ETS say that would value the noninvestment option too highly shouldn't it be lowly because they violate the model and lose market share.
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Re: Tough CR Question [#permalink] New post 13 Mar 2010, 12:17
D
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Re: Tough CR Question [#permalink] New post 19 Oct 2011, 02:16
D is correct.
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Re: Tough CR Question [#permalink] New post 06 Jan 2012, 09:06
Nice question
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Re: Companies considering new cost-cutting manufacturing proces [#permalink] New post 24 Oct 2013, 15:33
VTay25 wrote:
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. ( First of all, do they mean the alternative variables do not change)
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 ouf new manufacturing processes?( Looking at this, I want to know what ETS wants from us??)

(A) The costs of materials required by the new process might not be known with certainty.( I understand this, this is what the model says--it is projected.)

(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.--- It claims that the method described can accomadate alternative investments - ( but I don't see how. They just,I think, project costs, selling price, and share of market remaining.)

(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. ( It projects costs, so it can accomodate it.)

I'll stop at D to make it short, according to ETS, this is the right answer.

(D) Competitors that do invest in a new process might reduce their selling prices and thus take make share away from companies that do not.

( According to ETS, this method would systematically tend to value the noninvestment option too highly. Shouldn't it be it values the investment option too highly but if that is the case the model might project this! How can this be the right choice?
Bottom line, just explain as much as you can, thanks dudes.


Hi there Buddy, Thanks for the question
Suggestions:
- Write all the answer choices are originally in the question to give us all a fair chance of answering
- Please use spoiler

OK, let's tackle this one.

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 ouf new manufacturing processes?

So this basically says that they compare without changing costs, prices or market share.
What is the disadvantage of comparing this way?

(A) The costs of materials required by the new process might not be known with certainty ---> If they are not know with uncertainty I guess it is a good idea to exclude them. In this case, it only talks about 'costs' so this distinction 'of materials' is irrelevant. I don't quite like this answer. Let's move on

(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment ---> Interets? Where did that come from? This is totally out of scope

(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 one looks interesting, so cost cutting processes will require expensive investments that will be paid by savings. Now, if we are keeping costs constants we won't really be able to see these savings right? So I guess this could be the right answer. Let's keep this one in.

(D) Competitors that do invest in a new process might reduce their selling prices and thus take make share away from companies that do not.
---> This is taking about Market share and we are not including changes in market share. It says that it might happen.

So I think C, and D look better than A.

I think the basic difference is that in C we are talking about 'cost cutting processes' in general while in D we are talking about 'NEW processes'. I personally think D sounds just a little bit better, and I'm go with D just because they make that minor distinction.

So (D) it is
If anyone has some other thoughts, particullarly between C and D, I'm more than happy to discuss

Cheers!
J :)
Re: Companies considering new cost-cutting manufacturing proces   [#permalink] 24 Oct 2013, 15:33
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