Manufacturing RC-OG 13 : GMAT Reading Comprehension (RC)
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# Manufacturing RC-OG 13

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Joined: 24 Apr 2012
Posts: 53
Concentration: Strategy
WE: Project Management (Consulting)
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Kudos [?]: 70 [0], given: 33

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10 Apr 2014, 04:59
Manufacturers have to do more than build large
manufacturing plants to realize economies of scale.
It is true that as the capacity of a manufacturing
operation rises, costs per unit of output fall as plant
(5) size approaches "minimum efficient scale," where the
cost per unit of output reaches a minimum,
determined roughly by the state of existing technology
and size of the potential market. However, minimum
efficient scale cannot be fully realized unless a steady
(10) "throughput" (the flow of materials through a plant) is
attained. The throughput needed to maintain the
optimal scale of production requires careful
coordination not only of the flow of goods through the
production process, but also of the flow of input from
(15) suppliers and the flow of output to wholesalers and
final consumers. If throughput falls below a critical
point, unit costs rise sharply and profits disappear. A
manufacturer's fixed costs and "sunk costs" (original
capital investment in the physical plant) do not
(20) decrease when production declines due to inadequate
supplies of raw materials, problems on the factory
floor, or inefficient sales networks. Consequently,
potential economies of scale are based on the
physical and engineering characteristics of the
(25) production facilities—that is, on tangible capital—but
realized economies of scale are operational and
organizational, and depend on knowledge, skills,
experience, and teamwork—that is, on organized
human capabilities, or intangible capital.
(30) The importance of investing in intangible capital
becomes obvious when one looks at what happens in
new capital-intensive manufacturing industries. Such
industries are quickly dominated, not by the first firms
to acquire technologically sophisticated plants of
(35) theoretically optimal size, but rather by the first to
exploit the full potential of such plants. Once some
firms achieve this, a market becomes extremely hard
to enter. Challengers must construct comparable
plants and do so after the first movers have already
(40) worked out problems with suppliers or with new
production processes. Challengers must create
distribution networks and marketing systems in
markets where first movers have all the contacts and
know-how. And challengers must recruit management
(45) teams to compete with those that have already
mastered these functional and strategic activities.

37. The passage suggests that in order for a
manufacturer in a capital-intensive industry to have a
decisive advantage over competitors making similar
products, the manufacturer must
(A) be the first in the industry to build production
facilities of theoretically optimal size
(B) make every effort to keep fixed and sunk costs
as low as possible
(C) be one of the first to operate its manufacturing
plants at minimum efficient scale
(D) produce goods of higher quality than those
produced by direct competitors
(E) stockpile raw materials at production sites in
order to ensure a steady flow of such materials

38. The passage suggests that which of the following is
true of a manufacturer's fixed and sunk costs?
(A) The extent to which they are determined by
market conditions for the goods being
manufactured is frequently underestimated.
(B) Ifthey are kept as low as possible, the
manufacturer is very likely to realize significant
profits.
(C) They are the primary factor that determines
whether a manufacturer will realize economies
of scale.
(D) They should be on a par with the fixed and sunk
costs of the manufacturer's competitors.
(E) They are not affected by fluctuations in a
manufacturing plant's throughput.

39. In the context of the passage as a whole, the second
paragraph serves primarily to
(A) provide an example to support the argument
presented in the first paragraph
(B) evaluate various strategies discussed in the first
paragraph
(C) introduce evidence that undermines the
argument presented in the first paragraph
(D) anticipate possible objections to the argument
presented in the first paragraph
(E) demonstrate the potential dangers of a
commonly used strategy

40. The passage LEAST supports the inference that a
affected by
(A) a mistake in judgment regarding the selection of
a wholesaler
(B) a breakdown in the factory's machinery
(C) a labor dispute on the factory floor
(D) an increase in the cost per unit of output
(E) a drop in the efficiency of the sales network

41. The primary purpose of the passage is to
(A) point out the importance of intangible capital
for realizing economies of scale in
manufacturing
(B) show that manufacturers frequently gain a
competitive advantage from investment in large
manufacturing facilities
(C) argue that large manufacturing facilities often
fail because of inadequate investment in both
tangible and intangible capital
(D) suggest that most new industries are likelyto
be dominated by firms that build large
manufacturing plants early
(E) explain why large manufacturing plants usually
do not help manufacturers achieve economies
of scale
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Manufacturing RC-OG 13   [#permalink] 10 Apr 2014, 04:59
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