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# The price the government pays for standard weapons purchased

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Director
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The price the government pays for standard weapons purchased [#permalink]

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02 Jul 2007, 10:28
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The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
(B) The rate of inflation has varied considerably over the past twenty years.
(C) The contractual price will be greatly affected by the cost of materials used for the products.
(D) Many taxpayers question the amount of money the government spends on military contracts.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
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02 Jul 2007, 12:36
B, C, and D are out of scope

Between A and E, I go with A as it best weakens historical costing.
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02 Jul 2007, 12:52
Amit05 wrote:
The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
(B) The rate of inflation has varied considerably over the past twenty years.
(C) The contractual price will be greatly affected by the cost of materials used for the products.
(D) Many taxpayers question the amount of money the government spends on military contracts.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

I would go with C. This is defintely the basis for criticism of historical costing being an economically sound method.
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02 Jul 2007, 13:22
I will go for C also
Moreover, if the price of product is greatly affected by the cost of the material it is still possible that the average rate of inflation is lower than the rate of inflation of those specific materials.
Director
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02 Jul 2007, 15:54
Straight A.
Manager
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02 Jul 2007, 17:00
A definitely.
Manager
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02 Jul 2007, 18:20
A it is.
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02 Jul 2007, 19:44
A.

If Bush Sr. signed a military contract of this sort, Bush Jr. could still be paying for it now. That's not economically sound.
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03 Jul 2007, 02:42
OA?
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03 Jul 2007, 02:48
C - definitely

As it says, inflation is not a factor for the cost
but the raw materials are basis for the contractual price. directly attacks the passage and greatly weakens the passage.

A - CR is not talking about 'past inefficient use of funds' - so out of scope.

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03 Jul 2007, 03:39
A.
Director
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03 Jul 2007, 13:19
Juaz wrote:
Straight A.

The OA is A. Could you guys please explain why you think is the answer.
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03 Jul 2007, 14:46
If the OA is A then it seems that we should have viewed things from the point of view of the governement and not the contractors
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The price the government pays for standard weapons purchased [#permalink]

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11 Jun 2016, 00:38
(A) The government might continue to pay for past inefficient use of funds.

Explaination :- Have you ever tried doing a long math question, that starts with a complex division / multiplication of many long weird numbers with lots of decimals. What happens if your first steps has a decimal error. The final answer is mostly offset by a factor of 10 or 100 or 1000
For example 0.0081^1/2/ 3*1^-2

if you make a decimal error in solving 0.0081^{1/2}, that error will keep passing onto the next stage and the next stage and finally to the answer.

This is exactly the logic of this question.
This years Price = Last year price + Current rate of Inflation.
Simplifying and writing in mathematical form

Price in 2016 = Price in 2015 + current rate of inflation
Price in 2015 = Price in 2014 + current rate of inflation
Price in 2014 = Price in 2013 + current rate of inflation
Price in 2013 = Price in 2012 + current rate of inflation
Price in 2012 = Price in 2012 + current rate of inflation
Price in 2011 = Price in 2010 + current rate of inflation
Price in 2010 = Price in 2009 + current rate of inflation

But something funny happened in Price in 2009. The military advisor to the government took bribe from the weapon contractor and made the government buy weapons at a high rater. For example the government was fooled into buying a Radar system that cost 200 $for 4500$. Also the government was forced to buy a bullet that cost 1$for 5$.

After 2009, the government is buying things at a higher price because government pays for the last year price and inflation. So the government is paying for past errors. Past errors of bad fund utilisation. Just like the wrong decimal in the first step if a math problem.
What option reconfirms it

(A) The government might continue to pay for past inefficient use of funds.

The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
(B) The rate of inflation has varied considerably over the past twenty years.
(C) The contractual price will be greatly affected by the cost of materials used for the products.
(D) Many taxpayers question the amount of money the government spends on military contracts.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
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The price the government pays for standard weapons purchased   [#permalink] 11 Jun 2016, 00:38
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