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CR Question

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12 Jan 2012, 00:48
I am unable to comprehend such questions, please solve and explain.

Ques: Company Spokesperson: Over the past several years, our company has more than
doubled its revenues within the credit card division. However, over the same period,
the division's profits have steadily declined, largely as a result of a rapid increase in
default rates on credit card loans among our customers. It is time to recognize that
our previous strategy was flawed, since we failed to increase the average annual' percentage
rate (APR) charged on outstanding balances to compensate r the higher
default rates. According to our estimates, increasing the interest charged on outstanding
balances from an APR of9.S0/0 to an APR of 120/0 will be\$lJlRcient to
compensate for the current rate of defaults and bring the division back to profitable
growth.
Which of the following statements would most seriously undermine a plan to
increase interest rates in order to spur profitable growth?
(A) Many other companies have experienced a similar trend in their default rates.
(B) The company's operating expenses are above the industry average and can be
substantially reduced, thus increasing margins.
(C) The rapid increase in default rates was due to a rise in unemployment, but
unemployment rates are expected to drop in the coming months.
(D) The proposed increase in the APR will, alone, more than double the company's
operating margins.
(E) An increase in the APR charged on credit card balances often results in higher
rates of default.
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12 Jan 2012, 06:32
Expert's post
Siddarth,

The answer is E. I can explain how to approach this problem, however it would be best if you can write what you did not understand in this question. that way I can tailor my explanation. A few things will help me:

1. Were you able to comprehend the passage.
2. Were you able to separate the premises and conclusion.
3. Could you prethink any weakeners.

let me know the answers to the above and I will be happy to clarify any doubts.

Regards,

_________________

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12 Jan 2012, 22:57
Dear Rajat,
First of all thanks for your rationale.
As far as my understanding is concerns, Please see:

What I comprehend:
Initially revenues were doubled however, profits steady decreased, Profits can be decreased as
suppose, 1st yr. Revenues cost of production Profits
(Say) 20 10 10
2nd Yr. Revenues Cost of production Profits
(Say) 40 35 5

The passage is saying that this decrease in the profits is due to Increased default rates on credit loans. The conclusion is, previous is flawed because the company hasn't increased APR which will compensate for Increased default rates and thus bring back the firm to gain profits.

One weakness could be that only rise in APR % is not a solution to compensate,

Re: CR Question   [#permalink] 12 Jan 2012, 22:57
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