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# The price the government pays for standard weapons purchased

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

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07 Jan 2010, 14:29
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Official Guide for GMAT Verbal Review, 2nd Edition
Practice Question
Question No.: 4
Page: 117
Difficulty:

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.

[Reveal] Spoiler: OA
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07 Jan 2010, 16:14
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sagarsabnis 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.
This correctly shows that bad deals in the past will continue to affect contracts in the future. Pick A.

(B) The rate of inflation has varied considerably over the past twenty years.
if the rate of inflation varies, it will still increase the cost either by a little or alot. this doesnt say anything about historical prices.

(C) The contractual price will be greatly affected by the cost of materials used for the products.
Out of scope. question asks about the affect of historical pricing, not cost of materials

(D) Many taxpayers question the amount of money the government spends on military contracts.
Using opinions for an argument when these opinions weren't mentioned in the stimulus is wrong.

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
The development of new weapons is not at issue.

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08 Jan 2010, 05:50
I think A is the best among choices, though 'inefficient' feels like judging without enough facts.
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08 Jan 2010, 14:04
And thats the OA.

I had picked E as the answer thinking that of the new weapons are not going to be developed then why should government invest in it. That was my thinking. Can anyone explain why this is wrong?
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09 Jan 2010, 17:30
sagarsabnis wrote:
And thats the OA.

I had picked E as the answer thinking that of the new weapons are not going to be developed then why should government invest in it. That was my thinking. Can anyone explain why this is wrong?

question here is about historical costing - increasing the price on the same contract
Example :-its something like you get in a contract with a cell phone company and they keep increasing price every year adjusted for inflation , you want to get rid of plan but can not because of contract
however , in the mean time , cell phone companies keep coming up with new plans , new models , so innovation is still there - also note that this question does not talk about new products and option E is no where related
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09 Jan 2010, 22:38
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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.
- Clearly defines why it is not economically sound pricing

(B) The rate of inflation has varied considerably over the past twenty years.
- It does not criticize the method. Just gives us extra information

(C) The contractual price will be greatly affected by the cost of materials used for the products.
- Nothing is mentioned about cost of material used

(D) Many taxpayers question the amount of money the government spends on military contracts.
- Nothing is mentioned about tax payers

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
- Development of innovative weapons is irrelevant.
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20 Jul 2011, 19:11
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could someone explain this question using a technique from powerscore cr bible?
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20 Jul 2011, 21:12
ichha148 wrote:
question here is about historical costing - increasing the price on the same contract
Example :-its something like you get in a contract with a cell phone company and they keep increasing price every year adjusted for inflation , you want to get rid of plan but can not because of contract
however , in the mean time , cell phone companies keep coming up with new plans , new models , so innovation is still there - also note that this question does not talk about new products and option E is no where related

This is my opinion, as well. E is unrelated. And heck, if they continue to jack up the price, who says they can't innovate?
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07 Aug 2011, 03:20
i am also looking for a explanation , bit confused here
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Re: The price the government [#permalink]

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02 Sep 2011, 07:46
Expert's post
wats the problem with B.
consider an example- suppose the govt bought an assault rifle for 500$in the year 2009. Let the rate of inflation be 10%. then the price at which the govt would have bought the assault rifle would have been 550$.
for the next year, let the inflation rate be 5%. the the govt would have bought that rifle for 572.5\$. and so on...
considering this growth we can easily say that historical costing was not economical for the government.
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The price the government pays for standard weapons purchased [#permalink]

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28 Jun 2012, 19:40
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 product.
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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28 Jun 2012, 20:04
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sarb 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?

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

Premise: Price determined by historical costing
Premise: Historical costing to protect profits
Conclusion: None

What needs to be done: Criticize historical costing

The government might continue to pay for past inefficient use of funds. - This is what we want. It will be grounds to criticize the point of historical costing.

The rate of inflation has varied considerably over the past twenty years. - If you understood the passage then this is an automatic eliminate. Inflation necessitated the need for historical pricing.

The contractual price will be greatly affected by the cost of materials used for the product. - Now this is out of scope. And of course, this won't criticize.

Many taxpayers question the amount of money the government spends on military contracts. - This is also out of scope.

The pricing method based on historical costing might not encourage the development of innovative weapons. Ah! This is a very tempting answer choice. But what makes it wrong? Read it carefully, it says "INNOVATIVE WEAPONS." The passage, in contrast, just talks about "STANDARD WEAPONS." This is a trap! This goes to show how ONE WORD COULD MAKE OR BREAK an answer choice.
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Re: The price the government pays for standard weapons purchased [#permalink]

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28 Jun 2012, 20:12
gmatsaga wrote:
sarb 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?

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

Premise: Price determined by historical costing
Premise: Historical costing to protect profits
Conclusion: None

What needs to be done: Criticize historical costing

The government might continue to pay for past inefficient use of funds. - This is what we want. It will be grounds to criticize the point of historical costing.

The rate of inflation has varied considerably over the past twenty years. - If you understood the passage then this is an automatic eliminate. Inflation necessitated the need for historical pricing.

The contractual price will be greatly affected by the cost of materials used for the product. - Now this is out of scope. And of course, this won't criticize.

Many taxpayers question the amount of money the government spends on military contracts. - This is also out of scope.

The pricing method based on historical costing might not encourage the development of innovative weapons. Ah! This is a very tempting answer choice. But what makes it wrong? Read it carefully, it says "INNOVATIVE WEAPONS." The passage, in contrast, just talks about "STANDARD WEAPONS." This is a trap! This goes to show how ONE WORD COULD MAKE OR BREAK an answer choice.

thanks a lot for the explanations
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28 Jun 2012, 21:41
Can any one elaborate why option a is correct and option b is incorrect
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29 Jun 2012, 01:08
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Ankit04041987 wrote:
Can any one elaborate why option a is correct and option b is incorrect

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

so we are looking for a option that will criticize historical costing.

for option A :The government might continue to pay for past inefficient use of funds.
explanation: If the initial pricing itself was wrong then the Govt will continue to pay for its past error in the future because of historical pricing this is weakening point. this point is criticizing the historical pricing method, this is what we are looking for.

for option B: The rate of inflation has varied considerably over the past twenty years.
explanation: is this point criticizing historical pricing? NO. rather this point is supporting historical costing

hope it helps
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21 Aug 2012, 08:34
Agreed, Option A is the correct answer, however consider B for a moment.

Option B is attractive because the question mentions "economically sound pricing". Option B states that the rate of inflation "has varied considerably". Hence something varying can't be deterministic or sound eg. Stock prices. Aren't we criticizing historical costing this way, since the inflation prices factor in determining the current price ?? (from the q- "percentage increase, based on the current rate of inflation, to the previous year's contractual price")

sarb wrote:
Ankit04041987 wrote:
Can any one elaborate why option a is correct and option b is incorrect

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

so we are looking for a option that will criticize historical costing.

for option A :The government might continue to pay for past inefficient use of funds.
explanation: If the initial pricing itself was wrong then the Govt will continue to pay for its past error in the future because of historical pricing this is weakening point. this point is criticizing the historical pricing method, this is what we are looking for.

for option B: The rate of inflation has varied considerably over the past twenty years.
explanation: is this point criticizing historical pricing? NO. rather this point is supporting historical costing

hope it helps
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01 May 2013, 16:10
How do you know that the question is referring to the governments side of the deal rather than the contractors? I picked C because I thought it was referring to the military contractors and that if they engage in a contract at a certain price, then if their cost of materials goes up more than the inflation rate resulting in the method of HC pricing not working for them.

I understand how A is the answer but can someone explain how to determine the direction of the question? I am missing something.
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02 May 2013, 11:32
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sagarsabnis 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.

replying to a PVT message here I am

Now breaking down the argument

Quote:
The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.”

In a few words that means: the gov pay the industry based on the contract stipulated in the first ionstance. here, suddenly something must jumps at the top of my head

- the negative side is that I (goverment) pay the contract indipendently of whatsoever happens

- positive side is that the contract - maybe - is not influenced by the change of inflaction or other factors that comes up

Quote:
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.

Basically that means: the situation is freeze, always

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

This is what Im looking for: if the contract by the gov is suscibed (right or wrong) we HAVE TO pay, anyway

(B) The rate of inflation has varied considerably over the past twenty years.

The rate is out of scope

(C) The contractual price will be greatly affected by the cost of materials used for the products.

The cost of material is NOT the key point of the argument. We care ONLy about of the dynamic of the contract itself

(D) Many taxpayers question the amount of money the government spends on military contracts.

Out od scope

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

Out of scope

regards
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27 May 2013, 12:54
hi Richard,
even I also chose C based on the same resoning.
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30 May 2013, 22:41
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I was trying to pick between A and B. I picked A.

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. - This means if the past price was more than the practical estimate, it would affect future prices as well. Correct choice.

(B) The rate of inflation has varied considerably over the past twenty years.- This choice confused me. But, say the rate was lower and lower for the past 20 years, it still makes sense to add some delta value to the price quote. I am assuming that the increase was +ve. But A sounds better as the price did not have any basis in the first place. Also, the more important fact is that it cannot be a basis for criticizing the method

(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.
Re: The price the government pays for standard weapons purchased   [#permalink] 30 May 2013, 22:41

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