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# Hotco oil burners, designed to be used in asphalt plants,

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Hotco oil burners, designed to be used in asphalt plants, [#permalink]

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13 May 2010, 12:04
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74% (02:28) correct 26% (01:39) wrong based on 1050 sessions

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Hotco oil burners, designed to be used in asphalt plants, are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the cost savings between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years. On installation, the plant will make an estimated payment, which will be adjusted after two years to equal the actual cost savings.

Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above?

A) Another manufacturer’s introduction to the market of a similarly efficient burner
B) The Clifton Asphalt plant’s need for more than one new burner
C) Very poor efficiency in the Clifton Asphalt plant’s old burner
D) A decrease in the demand for asphalt
E) A steady increase in the price of oil beginning soon after the new burner is installed

For some reason I can't understand this. Any help will be most appreciated.
[Reveal] Spoiler: OA
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13 May 2010, 13:19
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is it (E)?

Hotco will get = amount paid for oil in last 2 years - amount paid for oil in next 2 years

now suppose the plant used 100 liters of oil in last 2 years at a price of $2 per liter....which means the plant spent$200 on oil

the price of oil is steadily increasing

now suppose the plane used 70 liters of oils (because the burner is efficient) in next 2 years at a price of $2.30 per liter....which means the plant will spend$161 on oil

Hotco will get = 200 - 161 = \$39 for its burner which will be disadvantageous for Hotco because of its plan.
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13 May 2010, 15:16
Yep. Your logic is right. Even if the burner is much more efficient than the old one, if the price of oil goes through the roof, the cost savings could be nil.
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13 May 2010, 16:02
this is a hard one... intially i thought its D but cost of oil going up will reduce the amount paid to Hotco.... assuming same amouint is used.
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14 May 2010, 09:51
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I think it's E.

As I read thru them, nothing really rang a bell until I got to E. Cuz if the price of oil goes up, then the cost savings for using this new burner becomes less and less. If the price goes up really high, then cost savings go to zero or even that there's negative cost savings (or that it ends up being more expensive than before). His payment is the cost savings, so if that goes to zero that's disadvantageous to the dude. Anybody disagree with E?
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15 May 2010, 03:54
can somebody explain - why D is not right?
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15 May 2010, 17:40
Yup the OA is E
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03 Nov 2010, 19:31
I just went over this problem and Chose D as well. I was stuck between D and E. Instinct took me to E first, but ultimately I thought that a D would also be a strong disadvantage is there was no asphalt production to claim the use of the oil...
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03 Nov 2010, 21:01
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In my opinion D will end up being profitable for Hotco

Less Demand- Less Oil used-Greater Savings ( Assuming Oil prices stay the same)--More money for HOTCO...

E is Right..
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04 Nov 2010, 13:20
Gosh this was a hard one > 3 minutes

E - using the key word "oil" also if the price of the oil goes up there won't be much savings Hotco would get back by selling it.
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06 Nov 2010, 11:12
Expert's post
maybe A ???? or not..........
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07 Nov 2010, 09:44
fell for D
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12 Apr 2011, 08:03
What kind of stimulus is it ? its first sentence is so long I was surely not able understand while doing it in timed practice.
Please check the sentence for grammatical errors
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12 Apr 2011, 08:07
After reading it twice I think it is E
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26 Apr 2011, 11:42
has to be E . and the explanation given above is accurate.

suppose the price for oil goes up so much that same amount of work costs more with hotco at new oil price than it used to cost with old burner at old oil prices.

then hotco will in fact have to pay money to the asphalt company according to the agreement,
as cost savings will be negative
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26 Apr 2011, 18:51
Straight E.
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Re: Hotco oil burners, designed to be used in asphalt plants, [#permalink]

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16 Apr 2013, 10:20
run4run wrote:
Hotco oil burners, designed to be used in asphalt plants, are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the cost savings between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years. On installation, the plant will make an estimated payment, which will be adjusted after two years to equal the actual cost savings.

Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above?

A) Another manufacturer’s introduction to the market of a similarly efficient burner
B) The Clifton Asphalt plant’s need for more than one new burner
C) Very poor efficiency in the Clifton Asphalt plant’s old burner
D) A decrease in the demand for asphalt
E) A steady increase in the price of oil beginning soon after the new burner is installed

I am not understanding the content of the argument.Need every answer choices explanation
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Re: Hotco oil burners, designed to be used in asphalt plants, [#permalink]

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05 May 2013, 09:17
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Situation: Hotco selling burner to CA plant
Transaction details : CA plant will pay X+Y amount (say). This breakdown can be explained as below:
X = Cost savings of the plant using old burner
Y = Future cost savings using hotco burner. (hotco is very confident about the savings as their burners are really efficient)
Now, the argument concludes with a plan whereby the CA plant will make an estimated payment(unrealised amount) & this amount will be adjusted on the actual cost savings after 2 years. So, Cost savings > estimated payment; the plant will pay hotco, the difference & vice versa.

Best way to attack this is to think about Y component, ie:- savings based on the installation of hotco burner(projected cash savings for 2 yrs). That is the unknown part. We cannot do much on X as we already know the savings using old burner(last 2 yrs)

Now if oil prices shoot up after the new installation, CA plant's savings is directly affected & thereby endangering hotco's plan, which will eventually lead hotco to a loss.
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Re: Hotco oil burners, designed to be used in asphalt plants, [#permalink]

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06 May 2013, 03:02
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mun23 wrote:
run4run wrote:
Hotco oil burners, designed to be used in asphalt plants, are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the cost savings between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years. On installation, the plant will make an estimated payment, which will be adjusted after two years to equal the actual cost savings.

Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above?

A) Another manufacturer’s introduction to the market of a similarly efficient burner
B) The Clifton Asphalt plant’s need for more than one new burner
C) Very poor efficiency in the Clifton Asphalt plant’s old burner
D) A decrease in the demand for asphalt
E) A steady increase in the price of oil beginning soon after the new burner is installed

I am not understanding the content of the argument.Need every answer choices explanation

I am giving it a try here to explain this:

Hotco will run into losses if the diference in the amount paid by Clifton asphalt manufacturing company in the last 2 yrs is close enuf to the cost that the compnay will pay in the nex t2 yrs. ok !!

A) Another manufacturer’s introduction to the market of a similarly efficient burner - there is no comparision with other manufacturers. irrelevant. INCORRECT

B) The Clifton Asphalt plant’s need for more than one new burner. - out of scope. INCORRECT

C) Very poor efficiency in the Clifton Asphalt plant’s old burner. - might sound true. but this is a catch. we cannot compare efficiencies of old and new burner.INCORRECT

D) A decrease in the demand for asphalt. - we have no clue what demand of asphalt has to do with oil burners. this is verbal section in gmat not a physics exam in a college. INCORRECT.

E) A steady increase in the price of oil beginning soon after the new burner is installed- If the price of oil increases, the company will have to pay more for its oil in the coming 2 yrs. so the difference in price will reduce and HETCO will receive less in return. - CORRECT.

Last edited by myselfhari on 06 May 2013, 13:39, edited 1 time in total.
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Re: Hotco oil burners, designed to be used in asphalt plants, [#permalink]

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06 May 2013, 13:35
How the hell to answer this when I have no idea what oil burner is and what the whole passage talks about...
Re: Hotco oil burners, designed to be used in asphalt plants,   [#permalink] 06 May 2013, 13:35

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