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Two years ago, the cost of the raw material used in a [#permalink]
10 Oct 2009, 16:33
36% (02:53) correct
64% (01:44) wrong based on 12 sessions
Two years ago, the cost of the raw material used in a particular product doubled after an earthquake disrupted production in the region where the material is mined. Since that time, the company that makes the product has seen its profit margins decline steadily. Aiming to improve profit margins, the company's head of engineering has decided that he must find a new source for the raw material.
Which of the following, if true, would cast the most doubt on the validity of the head of engineering's decision?
A. New competitors have entered the market every six months for the past two years, resulting in price wars that have progressively driven down revenues across the market. B. Although the earthquake occurred two years ago, the region's mines have still not recovered to pre-earthquake production capacity. C. There are several other regions in the world where the raw material is mined, but those regions do not produce as much of the raw material as the current source region. D. The company could use a completely different raw material to make its product. E. Recent advances in mining technology will make mining the raw material much more efficient and cost-effective in the future.
Although A does not mention anything about raw-material it says that revenues are declining due to price wars. So even if a cheap source is found, the profitability will not increase, it can only remain constant or decrease.
Answer should be C. If cost of the raw material is reduced, then the profit of the company will increase. When company shifts its mining place,a lot of additional cost is involved. Moreover, if the new location does not produce as much of the raw material as the current source region, then it casts doubt on the validity of the head of engineering's decision.