One name brand cereal manufacturer... : GMAT Critical Reasoning (CR)
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One name brand cereal manufacturer...

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  35% (medium)

Question Stats:

70% (02:10) correct 30% (01:17) wrong based on 141 sessions

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One name-brand cereal manufacturer is about to reduce wholesale prices for its cereals by 20 percent because consumers have been switching from its cereals to cheaper store brands. The success of this strategy relies on the assumption that supermarkets will pass on all of the savings by lowering the prices they charge consumers for the manufacturer’s cereals. Although supermarkets usually pass on such savings, in this case it is likely that supermarkets will not do so because _______.

(A) several other name-brand cereal manufacturers are about to reduce the wholesale prices of their cereals

(B) the average price per box of name-brand cereals has increased significantly in the last 10 years

(C) total annual sales of cereal - including both name-brand and store-brand cereals - have increased over the past 10 years

(D) supermarkets currently make far more profit on sales of store-brand cereals than on sales of name-brand cereals

(E) the current prices of the manufacturer’s cereals are comparable to the prices of name-brand cereals produced by other cereal manufacturers

[Reveal] Spoiler:
OA is NOT B. Can someone help me understand what the words "pass on" mean in the sentence "supermarkets will pass on savings...."
[Reveal] Spoiler: OA
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New post 29 Dec 2012, 15:13
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In this plan, manufacturer is planning to sell the product store at reduced wholesale price expecting that it will "Pass on" this reduced price to end customer.

For example:
Current situation:
Wholesale price to store: $8, Manufacturer Product: MRP- $12
Store Product: MRP- $10
In this case consumer is switching to Store brand as its cheaper (by $2)

Proposed situation:
Wholesale price to store: $6 (note 20% reduction), Manufacturer Product: MRP- $12, Expected Discounted consumer price: $10
Store Product: MRP- $10

Explanation:
In this case the manufacturer assumes that the store will sell manufacturer's product at discounted price down to $10 from $12 (i.e. will "pass on these savings" to consumer) With both the products priced same, it will eliminate the price incentive for consumers who are switching produces based on the price. However as the manufacturer is not reducing the price on MRP but wholesale prices, Store will not give discount to the customer and will still continue sell at MRP $12, making sure they continue to sell their store cereal product at cheaper price.

D is the correct answer.
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Last edited by PrashantPonde on 01 Jan 2013, 09:45, edited 1 time in total.
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New post 29 Dec 2012, 17:04
Thanks Prapon for providing some insight. But in the proposed solution which you mentioned, why did you again add 20% more discount? You have applied 20% (acc to current situation) + another 20% which is equivalent to 40%. Can you clarify?
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New post 29 Dec 2012, 22:37
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I guess I applied 20% applied only on wholesale price. In short - The manufacturer plans to reduce the wholesale price of the product from $8 to $6 (by 20%) and assumes that store will "pass on" that discount/savings to consumer by selling the product at $10 (discounted price) instead of $12 (MRP).
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New post 30 Dec 2012, 08:28
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New post 31 Dec 2012, 14:37
Its a MEDIUM level difficulty question
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New post 01 Jan 2013, 09:46
Yes D is the correct answer Carcass.
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New post 20 May 2013, 10:32
The official explanation is more convincing. It says- the store would want to continue with the store brand because it is more profitable rather than the new brand whose profit is less.
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Re: One name brand cereal manufacturer... [#permalink]

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New post 19 Jun 2014, 21:59
A simple query:

When supermarkets are focused on selling their store cereals, then why at the first place they are buying name-brand cereal from the manufacturer?
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New post 14 Aug 2015, 05:59
Hello from the GMAT Club VerbalBot!

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Re: One name brand cereal manufacturer...   [#permalink] 14 Aug 2015, 05:59
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