Profits for one of Company X's flagship products have been : GMAT Critical Reasoning (CR)
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# Profits for one of Company X's flagship products have been

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Profits for one of Company X's flagship products have been [#permalink]

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30 Jan 2013, 08:03
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Profits for one of Company X's flagship products have been declining slowly for several years. The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they felt the product’s functionality didn't justify a higher price. As a result, the CFO recommended that the company stop producing this product because the CEO only wants products whose profit margins are increasing.

The answer to which of the following questions would be most useful in evaluating whether the CFO's decision to divest the company of its flagship product is warranted?

A. Does the company have new and profitable products available with which to replace the flagship product?

B. Will the rest of Company X's management team agree with the CFO's recommendation?

C. Can Company X sell the flagship product to new markets to increase its customer base?

D. Are there additional features that could be added to the product without raising the unit price?

E. What percentage of Company X's revenues is represented by sales of the flagship product in question?

I'd appreciate any help, thank you.

I think this question is poorly written in because of 'unit price' shouldn't it read 'unit cost'? If you added features without increasing the unit price yes people may continue to purchase the product however, if these new feature increased you unit cost then your profit margins would decrease thus creating an issue for the CFO. If the answer choice read 'add features without increasing the unit cost' then this question is a no brainer, I got it right but I was confused as to why they worded it like this.
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Re: A CFO and Profit Margins [#permalink]

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30 Jan 2013, 09:02
Hi,

One way to attack CR is to make the information manageable by breaking it down the essentials:

1. The products profits are decreasing because consumers are not willing to pay the increased price (do to inflation/production costs) for this product considering the features

2. The CEO only wants to focus on products whose profits are increasing

3. Therefore the CEO wants to discontinue the product

So D is the only one that addresses the above: if the features can be augmented without increasing the price then perhaps consumers will respond by buying more. You can justify the idea of price because The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they felt the product’s functionality didn't justify a higher price. So the logic is can we add functionality which will justify the higher price (caused by inflation/production costs) without adding to the price. If we can do this the idea is that consumers will buy more of the product (because it has more features and the price stayed the same) and increase the profit from the product. Also, just because the cost does not increase does not mean that the price to the consumers doesn't increase. The real focus here is that the price is too high considering the features.

I hope this helps!

HG.
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Re: A CFO and Profit Margins [#permalink]

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31 Jan 2013, 09:54
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Profits for one of Company X's flagship products have been declining slowly for several years. The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they felt the product’s functionality didn't justify a higher price. As a result, the CFO recommended that the company stop producing this product because the CEO only wants products whose profit margins are increasing. <--- CONCLUSION

The answer to which of the following questions would be most useful in evaluating whether the CFO's decision to divest the company of its flagship product is warranted?

A. Does the company have new and profitable products available with which to replace the flagship product? Scope: Company X's flagship products. Thus, this is OFS

B. Will the rest of Company X's management team agree with the CFO's recommendation? Scope: CFO's decision to divest. OFS

C. Can Company X sell the flagship product to new markets to increase its customer base?

D. Are there additional features that could be added to the product without raising the unit price?
If Yes, than CFO's decision to divest the company of its flagship product is not warranted
If No, than CFO's decision to divest the company of its flagship product is warranted

E. What percentage of Company X's revenues is represented by sales of the flagship product in question? Scope: Profits for Company X's flagship products. Thus, this is OFS

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Re: Profits for one of Company X's flagship products have been [#permalink]

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29 Mar 2014, 17:44
Sales price - Cost of production = profit

this is reducing because of the two reasons:
1) Sales price cannot be increase as people perceive that the product do not have a lot of features for which they are ready to shell out more.
2) inflation has increased the Cost of production

the answer choice that links these to factors and gives a solution is D
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Re: Profits for one of Company X's flagship products have been [#permalink]

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30 Mar 2014, 11:50
IMO, D

Strikes right at the heart of the problem. Asks the basic question which is driving the product to shut down (low value for money being paid by customers)
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Re: Profits for one of Company X's flagship products have been [#permalink]

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03 Apr 2014, 08:16
How we can assume that adding features will improve functionality of the product...

What if I just start selling that product in a new market where people can pay price for current functionality...

We have only two options either change the market or change the functionality...

Lets assume: if in USA people think that $5 for Old monk rum does not commensurate to its quality compared to Jonny walker, but they are willing to pay$6 for Jonny walker because its a good product. Then as a CEO of Old monk what options I will have before shutting down the manufacturing ?
1. I can try to improve rum's quality for US buyers without reducing my profit margin.
or
2. I can sell it to counties like India where people people can take it as a good product compared to other local brands.

C and D both looks fine ..any expert feed back ?
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Re: Profits for one of Company X's flagship products have been [#permalink]

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03 Apr 2014, 08:23
this is an mgmat cat question and mgmat agreed to bring/change this question. It is poorly written.

http://www.manhattangmat.com/forums/pro ... 25380.html
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Re: Profits for one of Company X's flagship products have been [#permalink]

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04 Apr 2014, 12:42
Profits for one of Company X's flagship products have been declining slowly for several years. The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they felt the product’s functionality didn't justify a higher price. As a result, the CFO recommended that the company stop producing this product because the CEO only wants products whose profit margins are increasing.

The answer to which of the following questions would be most useful in evaluating whether the CFO's decision to divest the company of its flagship product is warranted?

A. Does the company have new and profitable products available with which to replace the flagship product?-Even if it has,how does it relate to discontinuing previous products-The basis,as per the argument, should be decreasing margins and not new products replacing old products for more profit.

B. Will the rest of Company X's management team agree with the CFO's recommendation?-Clearly doesn't help anywhere

C. Can Company X sell the flagship product to new markets to increase its customer base?-Even if we increase the consumer base,the profit margin per product remains the same-So doesn't help either

D. Are there additional features that could be added to the product without raising the unit price?- If product has more functionalities at the same cost price,we can justify the high price of the product in the market for the additional functionalities-Which addresses the previous complains of the consumers & hence if such an option is possible,it will help assess whether the product should be discontinued or not

E. What percentage of Company X's revenues is represented by sales of the flagship product in question? Increasing margin and not proportion of Sales is the point of concern
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Re: Profits for one of Company X's flagship products have been   [#permalink] 04 Apr 2014, 12:42
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