Find all School-related info fast with the new School-Specific MBA Forum

It is currently 23 Oct 2014, 13:38

Close

GMAT Club Daily Prep

Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.

Customized
for You

we will pick new questions that match your level based on your Timer History

Track
Your Progress

every week, we’ll send you an estimated GMAT score based on your performance

Practice
Pays

we will pick new questions that match your level based on your Timer History

Not interested in getting valuable practice questions and articles delivered to your email? No problem, unsubscribe here.

Events & Promotions

Events & Promotions in June
Open Detailed Calendar

Modern manufacturers, who need reliable sources of materials

  Question banks Downloads My Bookmarks Reviews Important topics  
Author Message
TAGS:
Expert Post
Math Expert
User avatar
Joined: 02 Sep 2009
Posts: 23398
Followers: 3611

Kudos [?]: 28840 [0], given: 2854

Modern manufacturers, who need reliable sources of materials [#permalink] New post 17 Jul 2014, 13:17
Expert's post
1
This post was
BOOKMARKED

GMAT weekly questions



Modern manufacturers, who need reliable sources of materials and technologically advanced components to operate profitably, face an increasingly difficult choice between owning the producers of these items (a practice known as backward integration) and buying from independent producers. Manufacturers who integrate may reap short-term rewards, but they often restrict their future capacity for innovative product development.

Backward integration removes the need for some purchasing and marketing functions, centralizers overhead, and permits manufacturers to eliminate duplicated efforts in research and development. Where components are commodities (ferrous metals or petroleum, for example), backward integration almost certainly boosts profits. Nevertheless, because product innovation means adopting the most technologically advanced and cost-effective ways of making components, backward integration may entail a serious risk for a technologically active company-for example, a producer of sophisticated consumer electronics.

A company that decides to make rather than buy important parts can lock itself into an outdated technology. Independent suppliers may be unwilling to share innovations with assemblers with whom they are competing. Moreover, when an assembler sets out to master the technology of producing advanced components, the resulting demands on its resources may compromise its ability to assemble these components successfully into end products. Long-term contracts with suppliers can achieve many of the same cost benefits as backward integration without compromising a company’s ability to innovate.

However, moving away from backward integration is not a complete solution either. Developing innovative technologies requires independent suppliers of components to invest huge sums in research and development. The resulting low profit margins on the sale of components threaten the long-term financial stability of these firms. Because the ability of end-product assemblers to respond to market opportunities depends heavily on suppliers of components, assemblers are often forced to integrate by purchasing the suppliers of components just to keep their suppliers in business.
According to the passage, which of the following relationships between profits and investments in research and development holds true for producers of technologically advanced components?

A. Modest investments are required and the profit margins on component sales are low.

B. Modest investments are required but the profit margins on component sales are quite high.

C. Despite the huge investments that are required, the profit margins on component sales are high.
D. Because huge investments are required, the profit margins on component sales are low.

E. Long-term contractual relationships with purchasers of components ensure a high ration of profits to investment costs.

OA:
[Reveal] Spoiler:
D


_________________

NEW TO MATH FORUM? PLEASE READ THIS: ALL YOU NEED FOR QUANT!!!

PLEASE READ AND FOLLOW: 11 Rules for Posting!!!

RESOURCES: [GMAT MATH BOOK]; 1. Triangles; 2. Polygons; 3. Coordinate Geometry; 4. Factorials; 5. Circles; 6. Number Theory; 7. Remainders; 8. Overlapping Sets; 9. PDF of Math Book; 10. Remainders; 11. GMAT Prep Software Analysis NEW!!!; 12. SEVEN SAMURAI OF 2012 (BEST DISCUSSIONS) NEW!!!; 12. Tricky questions from previous years. NEW!!!;

COLLECTION OF QUESTIONS:
PS: 1. Tough and Tricky questions; 2. Hard questions; 3. Hard questions part 2; 4. Standard deviation; 5. Tough Problem Solving Questions With Solutions; 6. Probability and Combinations Questions With Solutions; 7 Tough and tricky exponents and roots questions; 8 12 Easy Pieces (or not?); 9 Bakers' Dozen; 10 Algebra set. ,11 Mixed Questions, 12 Fresh Meat

DS: 1. DS tough questions; 2. DS tough questions part 2; 3. DS tough questions part 3; 4. DS Standard deviation; 5. Inequalities; 6. 700+ GMAT Data Sufficiency Questions With Explanations; 7 Tough and tricky exponents and roots questions; 8 The Discreet Charm of the DS ; 9 Devil's Dozen!!!; 10 Number Properties set., 11 New DS set.


What are GMAT Club Tests?
25 extra-hard Quant Tests

Get the best GMAT Prep Resources with GMAT Club Premium Membership


Last edited by PiyushK on 04 Aug 2014, 03:39, edited 1 time in total.
Added the missing passage text
Kaplan Promo CodeKnewton GMAT Discount CodesVeritas Prep GMAT Discount Codes
Expert Post
Math Expert
User avatar
Joined: 02 Sep 2009
Posts: 23398
Followers: 3611

Kudos [?]: 28840 [0], given: 2854

Re: Modern manufacturers, who need reliable sources of materials [#permalink] New post 17 Jul 2014, 13:18
Expert's post
Bunuel wrote:

GMAT weekly questions



Modern manufacturers, who need reliable sources of materials and technologically advanced components to operate profitably, face an increasingly difficult choice between owning the producers of these items (a practice known as backward integration) and buying from independent producers. Manufacturers who integrate may reap short-term rewards, but they often restrict their future capacity for innovative product development.

Backward integration removes the need for some purchasing and marketing functions, centralizes overhead, and permits manufacturers to eliminate duplicated efforts in research and development. Where components are commodities (ferrous metals or petroleum, for example), backward integration almost certainly boosts profits. Nevertheless, because product innovation means adopting the most technologically advanced and cost-effective ways of making components, backward integration may entail a serious risk for a technologically active company�for example, a producer of sophisticated consumer electronics.

According to the passage, which of the following relationships between profits and investments in research and development holds true for producers of technologically advanced components?

A. Modest investments are required and the profit margins on component sales are low.

B. Modest investments are required but the profit margins on component sales are quite high.

C. Despite the huge investments that are required, the profit margins on component sales are high.
D. Because huge investments are required, the profit margins on component sales are low.

E. Long-term contractual relationships with purchasers of components ensure a high ration of profits to investment costs.

OA:
[Reveal] Spoiler:
D


This question asks you to identify information presented in the passage about the relationship between profits and investments for producers of technologically advanced components.

The best answer is D. The passage indicates the high investments required to develop technologically advanced components can lead to low profit margins for producers of such components.

Choice A is incorrect because the passage indicates that large, not modest, investments in research and development are required.

Choices B and C are incorrect because the passage indicates that profit margins for producers of technologically advanced components are low, not high as these answer choices assert.

Choice E is incorrect: although the author claims that long-term contracts with suppliers are beneficial to assemblers, the passage does not indicate that long-term contracts with purchasers lead to high profits for producers of technologically advanced components.

Answer: D.
_________________

NEW TO MATH FORUM? PLEASE READ THIS: ALL YOU NEED FOR QUANT!!!

PLEASE READ AND FOLLOW: 11 Rules for Posting!!!

RESOURCES: [GMAT MATH BOOK]; 1. Triangles; 2. Polygons; 3. Coordinate Geometry; 4. Factorials; 5. Circles; 6. Number Theory; 7. Remainders; 8. Overlapping Sets; 9. PDF of Math Book; 10. Remainders; 11. GMAT Prep Software Analysis NEW!!!; 12. SEVEN SAMURAI OF 2012 (BEST DISCUSSIONS) NEW!!!; 12. Tricky questions from previous years. NEW!!!;

COLLECTION OF QUESTIONS:
PS: 1. Tough and Tricky questions; 2. Hard questions; 3. Hard questions part 2; 4. Standard deviation; 5. Tough Problem Solving Questions With Solutions; 6. Probability and Combinations Questions With Solutions; 7 Tough and tricky exponents and roots questions; 8 12 Easy Pieces (or not?); 9 Bakers' Dozen; 10 Algebra set. ,11 Mixed Questions, 12 Fresh Meat

DS: 1. DS tough questions; 2. DS tough questions part 2; 3. DS tough questions part 3; 4. DS Standard deviation; 5. Inequalities; 6. 700+ GMAT Data Sufficiency Questions With Explanations; 7 Tough and tricky exponents and roots questions; 8 The Discreet Charm of the DS ; 9 Devil's Dozen!!!; 10 Number Properties set., 11 New DS set.


What are GMAT Club Tests?
25 extra-hard Quant Tests

Get the best GMAT Prep Resources with GMAT Club Premium Membership

Intern
Intern
avatar
Joined: 23 May 2014
Posts: 12
Followers: 0

Kudos [?]: 4 [0], given: 9

Re: Modern manufacturers, who need reliable sources of materials [#permalink] New post 19 Jul 2014, 05:50
I have some serious trouble absorbing this passage

I read that modern manufacturers can choose backward integration (owning producers) to make short term profits by removing purchasing/R&D needs.

and then backward integration is risky because innovation is needed to make cheap products

but where does it say that component producers, who are presumably owned by modern manufacturers in backward integration, have low profit margins?
1 KUDOS received
Intern
Intern
avatar
Joined: 05 Nov 2013
Posts: 26
Followers: 0

Kudos [?]: 11 [1] , given: 69

Re: Modern manufacturers, who need reliable sources of materials [#permalink] New post 01 Aug 2014, 19:52
1
This post received
KUDOS
Incomplete passage above..

Here's the full passage:


Modern manufacturers, who need reliable sources of materials and technologically advanced components to operate profitably, face an increasingly difficult choice between owning the producers of these items (a practice known as backward integration) and buying from independent producers. Manufacturers who integrate may reap short-term rewards, but they often restrict their future capacity for innovative product development.

Backward integration removes the need for some purchasing and marketing functions, centralizers overhead, and permits manufacturers to eliminate duplicated efforts in research and development. Where components are commodities (ferrous metals or petroleum, for example), backward integration almost certainly boosts profits. Nevertheless, because product innovation means adopting the most technologically advanced and cost-effective ways of making components, backward integration may entail a serious risk for a technologically active company-for example, a producer of sophisticated consumer electronics.

A company that decides to make rather than buy important parts can lock itself into an outdated technology. Independent suppliers may be unwilling to share innovations with assemblers with whom they are competing. Moreover, when an assembler sets out to master the technology of producing advanced components, the resulting demands on its resources may compromise its ability to assemble these components successfully into end products. Long-term contracts with suppliers can achieve many of the same cost benefits as backward integration without compromising a company’s ability to innovate.

However, moving away from backward integration is not a complete solution either. Developing innovative technologies requires independent suppliers of components to invest huge sums in research and development. The resulting low profit margins on the sale of components threaten the long-term financial stability of these firms. Because the ability of end-product assemblers to respond to market opportunities depends heavily on suppliers of components, assemblers are often forced to integrate by purchasing the suppliers of components just to keep their suppliers in business.
Re: Modern manufacturers, who need reliable sources of materials   [#permalink] 01 Aug 2014, 19:52
    Similar topics Author Replies Last post
Similar
Topics:
Experts publish their posts in the topic Modern manufacturers, who need reliable sources of materials and techn Bunuel 1 24 Sep 2014, 04:56
1 Experts publish their posts in the topic Modern manufacturers, who need reliable sources of materials carcass 2 20 Dec 2012, 11:28
1 Experts publish their posts in the topic Modern manufacturers, who need reliable sources of materials carcass 5 04 Jul 2012, 08:00
10 Experts publish their posts in the topic Modern producers, when they need reliable sources of daagh 28 23 Jun 2011, 00:56
is the 1000SC and CR a reliable/worth source of practice stallone 3 11 Aug 2008, 19:45
Display posts from previous: Sort by

Modern manufacturers, who need reliable sources of materials

  Question banks Downloads My Bookmarks Reviews Important topics  


GMAT Club MBA Forum Home| About| Privacy Policy| Terms and Conditions| GMAT Club Rules| Contact| Sitemap

Powered by phpBB © phpBB Group and phpBB SEO

Kindly note that the GMAT® test is a registered trademark of the Graduate Management Admission Council®, and this site has neither been reviewed nor endorsed by GMAC®.