Because of an upcoming increase in the rent for the performance space

There could be many assumptions/strengthens in this stem.

Profit = Revenue - cost

Decline in profit ,so there could be many ways .

1.Keeping revenue constant,increase in cost.
2.Keeping cost constant,decrease in revenue.
3.Both decrease,but decrease in revenue is more than that of cost.


However,in the answer options we have option number (2). decrease in revenue as now there will be shows for only 1 month instead of 2 so revenue/week * number of weeks will decrease

Hence ,OA

Can someone explain why A can not be the answer?

Premise states that 1) Shows are reduced from 2 months to 1 month. 2) Most of the costs are not going to be affected due to this idea.

Choice A states that actors are contracted for 3 months and it takes 1 month for rehearsal, probably, that's why originally shows were scheduled for 2 months. Wouldn't the company end up paying actors or its agency for 3 months while employing them only for 2 months?
[We could ask there's no information on whether actors are reused between different productions. But, I am unable to identify C even a contender because, it states the advertisers will continue to spend the same amount and it will be on weekly basis

Okay I don't buy this answer.

The premise states that the run time of shows will be cut from 2 months to 1 month. Answer (A) claims that shows don't require more than 1 month of preparation.

Assuming both these are true, then having to hire an actor for 3 months will clearly increase costs because you have to hire more actors. The only explanation that makes sense is if the same actor can appear in multiple shows.

Pre Change
Hamlet: run time = 2 months, preparation = 1 month
Actor being paid for 3 months

Every 3 months, actors are being paid 3 months salary

Post Change
Hamlet: run time = 1 month, preparation = 1 month
Actor being paid for 3 months

Every 2 months, actors are being paid 3 months salary (effectively, because you have to hire new actors for the next production)

Please tell me how this doesn't increase costs. Vercules, your explanation doesn't do it for me. I understand how (D) can be correct, but I don't understand how (A) can be incorrect.

Edit:

Nevermind, solved it myself. It comes down to the fact that revenues are derived from subscriptions, and not from number of shows. In fact, the prompt states that the number of shows will remain the same, although this doesn't matter. Because these people will pay their subscriptions regardless, the revenue side of it doesn't change. The cost side doesn't change either because their is no need to prioritize the number of different shows ran every year.

For instance, the company can run 4 different productions a year, and hire 4 different actors to play in them

In the old case, the actors will basically be getting paid 1 months salary for 1 months work, 3 months work = 3 months salary
In the new case, the actors will be getting paid 3/2 months salary for 1 months work, 2 months work = 3 months salary

However, because the theater gains no additional revenue from optimizing the amount of productions it runs, then there's no difference between these two cases. If the companies were being paid on the bases on each production, as in, more productions = more revenue, then this matters because the company can optimize to produce 5 productions per year as opposed to 4 productions per year while paying the same actor costs. This is not the case though

Profit = Revenue - Cost. Profit will decline if either the revenue decreases or the cost increases. Lets see what constitutes revenue and cost in this case:
Cost = Rent of space + fees of actors + (number of episodes * per episode cost)
Revenue = (number of subscribers * subscription price) + (number of episodes/show * advertising time)

We know that Rent is going to increase, and hence the company decides to reduce the number of episodes to half in order to balance production cost. Therefore, if cost is going to remain the same, revenue should decrease in order to reduce profits.

Option A - actors were paid for 3 months earlier and are paid for 3 months even now.
Option D - number of episodes per show will decrease which will decrease (number of episodes/show * advertising time) and therefore result in lower revenues. Hence, D is the correct answer.

This is very much similar to the below mentioned GMAT Prep CR question. A paraphrase of GMAT Prep question. ...

Because postage rates are rising, Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year. The quality of articles, the number of articles published per year, and the subscription price will not change. Market research shows that neither subscribers nor advertisers will be lost if the magazine's plan is instituted.

Which of the following, if true, provides the strongest evidence that the magazine's profits are likely to decline if the plan is instituted?

A. With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.

B. The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles.

C. Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.

D. Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past.

E. Production costs for the magazine are expected to remain stable.

In Option D, as advertisers will pay weekly basis, Revenue will be reduced for theatre company. This is clear winner

Responding to a pm:

Premises:
Rent is increasing so company will cut down costs by reducing show lengths from 2 months to 1 month.
Most of company audience is subscribers who will remain intact after the change.
Advertisers will not be lost either. (So it seems that the company's revenue will remain the same but the cost will be cut)

Plan:
Maximize profit by keeping revenue similar but reducing cost.

We need to find the option that will lead to profits declining (not increasing as per the plan). So we need to find the option which will have a negative impact on the plan (revenue will decrease or cost will increase or both)

(A) The actors' union requires that a company the size of Greenland Theatre must contractually hire actors for a minimum of three months, and shows generally do not require more than a month of rehearsal.

So the company must be hiring actors for 3 months at this time too. This option tells us that the cost of actors would stay the same even if the pan is implemented. It does not lead to lower revenue or higher costs. Not the answer.

(B) The majority of the company's subscribers are less concerned about a possible drop in the number of performances than they are about a possible decrease in the quality of those performances.

We are given that subscribers will stay put with decrease in number of performances. Does not impact our plan.

(C) Since Greenland Theatre is one of the few reputable theatre companies in the area, many of the company's subscribers would still renew their subscriptions if the subscription prices increased.

Out of scope. Argument says that the subscription price will remain the same in the plan. What will happen if the subscription price is increased is immaterial.

(D) Most of the advertisers that purchase space in the programs for the different productions will continue to spend the same amount on advertising per week as they have in the past.

Important point - Advertisers will spend the same amount per week. So if instead of 8 weeks, they advertise for 4 weeks only (since the play will run for 4 weeks only), the revenue will decrease. This could mean lower profits. Hence this is our answer.

(E) Production costs, including playwright royalties, fees for designers, and set and costume building expenses, are expected to remain stable.

Prod Costs are expected to remain stable. It does not impact our plan.

Answer (D)

VeritasKarishma How would the advertising matter if it is already mentioned in the premise that the subscribers will not reduce assuming that the advertising will be to attract more customers but as mentioned in the premise, they already have a strong base of subscribers. Please explain on this.

Subscribers are advertisers are different set of people. They bring in revenue for the company.
Subscribers are the regular audience who pay to watch the show. Subscribers could be people who buy, say, season tickets regularly.
Advertisers are those that advertise their products during the show or in the invite brochure etc. Just like advertisers advertise their products on tv before/after and during tv shows.

VeritasKarishma How would the advertising matter if it is already mentioned in the premise that the subscribers will not reduce assuming that the advertising will be to attract more customers but as mentioned in the premise, they already have a strong base of subscribers. Please explain on this.[/quote]

Subscribers are advertisers are different set of people. They bring in revenue for the company.
Subscribers are the regular audience who pay to watch the show. Subscribers could be people who buy, say, season tickets regularly.
Advertisers are those that advertise their products during the show or in the invite brochure etc. Just like advertisers advertise their products on tv before/after and during tv shows.[/quote]

VeritasKarishma Ok. I kind of assumed that since subscribers are 90% of the audience which is not decreasing as mentioned so revenue would not get much affected. But it looks like the advertisers will affect the rest 10% of people which will impact the revenue as well. Correct me if I am wrong.

No, I don't think you have got the point - advertisers are not there to get more audience. Advertisers advertise their products e.g. AIG advertising life insurance before a TV show or during the interval in a movie.
The production house gets revenue from two different streams - people pay money to the house view the show. Advertisers pay money to the house to get permission to advertise to people who come to view the show.
Just the way it happens for newspaper houses - people pay them to buy newspapers. Plus, advertisers such as Target pay them to advertise home appliances for print ads in the newspapers.

Review the argument from this context.

I would try to provide my understanding on Option A vs D debate.
Over 90 percent of the company's regular audience consists of subscribers, and the subscription price will remain the same, as will the number and quality of shows produced. Extensive surveys show that neither subscribers nor advertisers will be lost if the company's plan is instituted.

What we learn from these two lines ?
1. The number of SUBSCRIBERS will remain unchanged.
2. The number of advertisers will remain unchanged.
3. Price of subscription will remain unchanged.

A. The actors' union requires that a company the size of Greenland Theatre must contractually hire actors for a minimum of three months, and shows generally do not require more than a month of rehearsal.

This may sound like a good choice, but think about it:
- The subscription price is unchanged and the number of people that subscribed is also unchanged. --> Company Revenue and costs are unaffected!
ALL WE CAN SAY IS THAT THE ACTORS ARE GETTING PAID, COMPARATIVELY, MORE; I.E, they are getting paid for 3 months but they are working for just 2 months.
Does this affect the CURRENT PROFIT in anyway? Refer back to what we learned earlier(green text)
The Answer is NO.

D. Most of the advertisers that purchase space in the programs for the different productions will continue to spend the same amount on advertising per week as they have in the past.

Focus on per week above ; Option D tells us that Ad revenue WILL decrease if the duration is shortened.

Answer D.

Which of the following, if true, provides the strongest evidence that the theatre company's profits are likely to decline if the plan is instituted?

A. The actors' union requires that a company the size of Greenland Theatre must contractually hire actors for a minimum of three months, and shows generally do not require more than a month of rehearsal. -> 3 months contract means 3 months of payment to actors. So, cost will be same. Also, there is nothing impact in incoming source of income. Incorrect.

B. The majority of the company's subscribers are less concerned about a possible drop in the number of performances than they are about a possible decrease in the quality of those performances. -> Incorrect.

C. Since Greenland Theatre is one of the few reputable theatre companies in the area, many of the company's subscribers would still renew their subscriptions if the subscription prices increased. -> It may increase in profit. Incorrect.

D. Most of the advertisers that purchase space in the programs for the different productions will continue to spend the same amount on advertising per week as they have in the past. -> So, no increase in source of income, while from argument cost (rent cost) will increase. It clearly states profit will decrease. Let's keep it.

E. Production costs, including playwright royalties, fees for designers, and set and costume building expenses, are expected to remain stable. -> If cost is same then how can profit decline. We need to see impact on source of income. Incorrect.

So, I think D.

Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

Want to see all other topics I dig out? Follow me (click follow button on profile). You will receive a summary of all topics I bump in your profile area as well as via email.