12 Days of Christmas GMAT Competition - Day 2: SpeedTech Electronics m

A. This does not address profit reduction. - Incorrect.

B. This may suggest that it will affect consumer thinking but not fully supported. - Incorrect.

C. If revenue at higher price is exceeding cost saving significantly then it is pretty sure that profit will decrease at lower price as revenue will decrease and cost saving is constant. - Correct.

D. This does not address profit reduction. - Incorrect.

E. This does not address profit reduction. - Incorrect.

Both B and C address the key issue of price: AP is a higher-priced product due to its perceived value or revenue contribution. Offering it at the lower SP price would result in lost profits.
Between the two, C is more focused on the direct impact on profits due to revenue differences, while B hints at perceived value but is slightly less direct.
Best Answer: C.

To explain why SpeedTech’s profits would decrease if it only offered Advanced Processors (AP) at the price level of Standard Processors (SP), we need to identify factors that address both profitability and the impact of price changes. Specifically, we need an explanation for why combining the product lines (and selling AP at SP’s price) would hurt profitability despite AP being more cost-efficient to produce.
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Key Insights:

1. Profit = Revenue - Costs. While AP is cheaper to produce, selling it at SP’s price reduces revenue per unit for AP, potentially harming profitability.
2. We need an explanation focusing on pricing differences and their impact on revenue.

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Analysis of Choices:
A. The materials used in AP are more readily available and cheaper than those used in SP, which initially reduced manufacturing costs.

• This explains why AP is cheaper to produce but doesn’t address why profits would decrease when selling AP at SP’s price.
• Eliminate.

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B. The production method for AP allows for faster output but the sale price for AP has traditionally been set higher due to perceived value.

• This highlights that AP has a higher price due to perceived value, which is important. However, it doesn’t explain why combining the lines (and selling AP at SP’s lower price) would lead to a decrease in profits.
• Incomplete explanation. Eliminate.

[hr]
C. The revenue generated from the higher-priced AP significantly exceeds the cost savings from its more efficient production compared to SP.

• This directly addresses the issue: the revenue from selling AP at a higher price is critical to profitability. Selling AP at SP’s lower price would result in lost revenue that outweighs the cost savings from producing AP.
• Correct answer.

[hr]
D. The research and development costs for developing AP were recouped quickly due to initial high interest when it was first launched.

• While this explains why AP became profitable early, it doesn’t address why combining the product lines and selling AP at SP’s price would decrease profits.
• Eliminate.

[hr]
E. While AP is more cost-effective to produce, it requires more frequent updates and enhancements than SP.

• This suggests AP might have higher long-term costs, but it doesn’t explain why offering AP at SP’s price would specifically harm profits.
• Eliminate.

[hr]
Correct Answer: C.
The loss of revenue from selling AP at SP’s lower price outweighs the cost savings, leading to decreased profits.

The answer would be option C.

Question:
SpeedTech Electronics manufactures two types of processors: a Standard Processor (SP) and a higher-priced Advanced Processor (AP). Producing AP is actually more cost-efficient than producing SP due to advancements in technology and manufacturing processes. However, financial analysts at SpeedTech have determined that the company's profits would decrease if it combined the two product lines, offering its customers only the AP product at the price level of SP.

Assuming that transitioning from SP to AP manufacturing incurs minimal costs, which of the following, if true about SpeedTech, best explains the results of the analysts' calculation?

A. The materials used in AP are more readily available and cheaper than those used in SP, which initially reduced manufacturing costs.
B. The production method for AP allows for faster output but the sale price for AP has traditionally been set higher due to perceived value.
C. The revenue generated from the higher-priced AP significantly exceeds the cost savings from its more efficient production compared to SP.
D. The research and development costs for developing AP were recouped quickly due to initial high interest when it was first launched.
E. While AP is more cost-effective to produce, it requires more frequent updates and enhancements than SP.

Answer:
The argument says that the manufacturing costs for AP is efficient than SP due its technology advancements and manufacturing process. However we have an analyst review that the company would not turn out profitable because offering AP at SP price level and we need to find an answer which says why would the financial analysts say that way? Something is wrong with AP that is making it to be less profitable.

Option A - This says that the materials are readily available and the costs are less which strengthens but not answering the FA (Financial Analysts) comment

Option B - This says that the sale price is set higher for AP which again strengthens and not answer why it turned out less profitable.

Option C - Now we have an answer that says the costs are higher than the revenue generated when the company markets AP at SP price level and thus leading to less profitable

Option D and E does not strongly answer why the AP would not turn profitable.

OA is C


The analysts' calculation suggests that simply offering the AP at the price level of SP would reduce profits. This indicates that the higher revenue from the AP product, which likely comes from its higher price point, plays a significant role in the overall profitability. While AP is more cost-efficient to produce, the significant revenue generated from selling AP at a higher price outweighs the cost savings. Therefore, lowering the price of AP to match SP would result in a loss of this revenue, leading to a decrease in overall profits.

We have to find other variable except for producing cost, that can decrease the profit if AP is sold at the same price as SP

E. While AP is more cost-effective to produce, it requires more frequent updates and enhancements than SP.
This means there is other factor that will contribute to higher cost, beside the manufacturing cost

Ans. (C)

It can be inferred that the company's profits will decrease.

IMO C

To determine which option best explains why combining the two product lines and offering only the AP product at the SP price level would decrease profits, we need to consider the financial implications of such a decision. Specifically, we need to understand why the analysts believe that despite the cost-efficiency of producing AP, profits would still decrease if AP were sold at the SP price.

Let's analyze each option:

A. The materials used in AP are more readily available and cheaper than those used in SP, which initially reduced manufacturing costs.

This option explains why AP is cheaper to produce but does not address the impact on profits if AP is sold at the SP price.

B. The production method for AP allows for faster output but the sale price for AP has traditionally been set higher due to perceived value.

This option suggests that AP has a higher perceived value, which justifies its higher price. If AP were sold at the SP price, the company would lose the premium revenue associated with AP's higher perceived value, leading to decreased profits.

C. The revenue generated from the higher-priced AP significantly exceeds the cost savings from its more efficient production compared to SP.

This option directly addresses the financial impact. It suggests that the higher price of AP generates significantly more revenue than the cost savings from its efficient production. Therefore, selling AP at the SP price would result in a substantial loss of revenue, outweighing the cost savings and leading to decreased profits.

D. The research and development costs for developing AP were recouped quickly due to initial high interest when it was first launched.

This option explains the initial financial success of AP but does not address the ongoing impact on profits if AP were sold at the SP price.

E. While AP is more cost-effective to produce, it requires more frequent updates and enhancements than SP.

This option suggests that AP has higher ongoing maintenance costs, but it does not directly explain why selling AP at the SP price would decrease profits.
Based on the analysis, the option that best explains the results of the analysts' calculation is:

C. The revenue generated from the higher-priced AP significantly exceeds the cost savings from its more efficient production compared to SP.

This option clearly indicates that the higher revenue from selling AP at its traditional higher price is crucial for maintaining profits. Selling AP at the lower SP price would result in a significant loss of revenue, which would not be offset by the cost savings from its efficient production, thereby decreasing overall profits.

We need an option that strengthens the analyst's results that the profits will decline if only AP is produced at the cost of SP.

All the options besides E) weaken the results. Only E) shows a possible reason for profits declining.

A. While this explains why AP is cost-efficient, it doesn’t address the revenue or profit decrease when selling AP at SP’s price. Incorrect

B. What if perceived value doesn’t matter, this option loses its explanatory power. Consumers wouldn’t mind buying AP at SP’s price, which means demand could shift, but profitability wouldn’t hinge on perception. Incorrect

C. This directly ties profitability to revenue. If the price of AP is lowered to SP’s level, the revenue drop would outweigh the production cost savings, resulting in lower profits. Correct

D. Past R&D recovery doesn’t explain why profits would drop now when AP is sold at SP’s price. Incorrect

E. Higher maintenance costs for AP might affect profitability, but this doesn’t explain why lowering the price of AP to SP’s level specifically reduces profits. Incorrect

Answer C.

Lets say
Cost of producing SP = $100 and sell price of SP=$200
Cost of producing AP = $80 and sell price is = $1000

Clearly it wouldn't make sense to offer AP at the reduced price of $200 just to say $20 of production cost.
Hence correct ans is option C.

A. Even though AP materials might be cheaper, the higher price point is where the money comes from, so without it, profits would drop.

B. It acknowledges that the higher price of AP reflects its perceived value, which means SpeedTech could lose out on revenue if both product lines were combined at the SP price. This could indeed lead to a decrease in profitability.

C. This option shows AP’s price brings in more revenue than the cost savings, so combining them at the SP price would hurt profits.

D. The R&D costs are already paid off, but that’s not the main issue here. It’s about pricing and profit potential.

E. AP needing more updates doesn’t directly explain why combining the product lines would hurt profitability. The problem is more about losing out on revenue from AP’s higher price.

So, B is the best bet – it explains why the higher price matters and why SpeedTech could lose out on money if they combine the lines at the SP price.

A)
While this explains why AP might be cheaper to produce, it doesn't directly address the price difference between AP and SP in terms of how the company could lose profits if AP is sold at SP prices.
This option doesn’t fully explain why the analysts expect profits to decrease when offering AP at the SP price.
B)
This is a strong contender because it explains that the higher sale price of AP is due to its perceived value.
If the company were to lower the price of AP to SP levels, it would lose the perceived value premium that customers associate with AP. The higher sale price is necessary to cover the costs and ensure profitability.
This option suggests that the perceived value of AP supports its higher price, and reducing it to SP's price level would decrease profits.
C)
This directly addresses the issue of profit loss when offering AP at the SP price.
While AP is more cost-effective, the revenue from AP’s higher price contributes significantly to the company’s overall profits. If the price were lowered to match SP’s price, the revenue would decrease, and the company would lose the advantage of selling at a premium price.
This option provides the best explanation for why the analysts’ calculations show a decrease in profits when AP is sold at the SP price level.
D)
This is about recouping R&D costs rather than the relationship between cost savings and pricing.
While it suggests the company benefited early from AP, it doesn’t explain why offering AP at the SP price would lead to profit decrease in the long run.
Therefore, it doesn’t directly address the current situation regarding pricing and profitability.
E)
This option suggests that AP’s higher maintenance costs could reduce its profitability in the long term, but it doesn’t address the pricing mismatch between AP and SP.
The main issue in the question is that offering AP at SP’s price will result in lower profits, and this option doesn’t directly explain that aspect of the problem.

So, option C

Conclusion: the company's profits would decrease if it combined the two product lines, offering its customers only the AP product at the price level of SP.


A. The materials used in AP are more readily available and cheaper than those used in SP, which initially reduced manufacturing costs.
Doesn't explain the conclusion that profits would decrease when combining the product lines

B. The production method for AP allows for faster output but the sale price for AP has traditionally been set higher due to perceived value.
Doesn't explain the conclusion that profits would decrease when combining the product lines

C. The revenue generated from the higher-priced AP significantly exceeds the cost savings from its more efficient production compared to SP.
This is the right answer. The decrease in revenue exceeds cost savings, leading to lower profits

D. The research and development costs for developing AP were recouped quickly due to initial high interest when it was first launched.
Doesn't explain the conclusion that profits would decrease when combining the product lines

E. While AP is more cost-effective to produce, it requires more frequent updates and enhancements than SP.
Doesn't explain the conclusion that profits would decrease when combining the product lines

Answer: :C

A) This would contradict the findings of analysts as the profits in this case have no reason for being less than before if the materials are cheaper than SP. WRONG

B) This also would mean profits would be higher than before and not less. faster output would lead to more units that can be sold and a higher price would mean more margin which translates to more profits. Opp of what the analysts have said. WRONG.

C) if the revenues from AP exceed the cost savings from its cost efficient production would mean more profits, hence opposite to what has been proposed. WRONG

D) If the R and D costs have been recouped then there is no reason to believe that the profits will decrease as already the AP production is cost efficient and sold at the SP's price point, Hence WRONG

E) CORRECT, if the AP needs more frequent updates then that could bring up the overall cost to the company and hence might reduce the profits from AP.

Assuming that transitioning from SP to AP manufacturing incurs minimal costs, which of the following, if true about SpeedTech, best explains the results of the analysts' calculation?

There clearly seems to be a gap which fails to mention high sales price of AP resulting into higher revenue which would be the leading factor in the declining profits even after the adoption of cost-efficient production. Let's see which answer choice best fills the gap.

A. The materials used in AP are more readily available and cheaper than those used in SP, which initially reduced manufacturing costs. This choice talks about the cost efficient production but fails to give any data points to conclude the impact on profits.
B. The production method for AP allows for faster output but the sale price for AP has traditionally been set higher due to perceived value. A close answer choice which talks about traditionally higher price range of AP, but the wording of faster output seems a bit off as it clearly doesn't target the cost efficiency aspect directly. Let's leave this in for comparison later.
C. The revenue generated from the higher-priced AP significantly exceeds the cost savings from its more efficient production compared to SP. This seems to more accurately target both the higher price range and the cost efficiency gap with the keyword significantly which makes it a strong contender.
D. The research and development costs for developing AP were recouped quickly due to initial high interest when it was first launched. Talks about research and development in the past which is irrelevant
E. While AP is more cost-effective to produce, it requires more frequent updates and enhancements than SP. Irrelevant.

Between B and C, C seems to be more accurate targeting the gap more directly.

SpeedTech Electronics manufactures two types of processors: a Standard Processor (SP) and a higher-priced Advanced Processor (AP). Producing AP is actually more cost-efficient than producing SP due to advancements in technology and manufacturing processes. However, financial analysts at SpeedTech have determined that the company's profits would decrease if it combined the two product lines, offering its customers only the AP product at the price level of SP.

Assuming that transitioning from SP to AP manufacturing incurs minimal costs, which of the following, if true about SpeedTech, best explains the results of the analysts' calculation?

Company's Profits initially = Profits from sales of SP + Profits from sales of AP = (Revenues from sales of SP - Costs of production of SP) + (Revenues from sales of AP - Cost of production of AP) = Quantities of SP sold (Price of SP - Cost of production of per unit of SP) + Quantities of AP sold (Price of AP - Cost of production of per unit of AP)

Company's profits if it combined the two product lines, offering its customers only the AP product at the price level of SP = Revenues from sales of AP - Cost of production of AP = Quantities of AP sold (Price of SP - Cost of production per unit of AP)

A. The materials used in AP are more readily available and cheaper than those used in SP, which initially reduced manufacturing costs.
The statement justifies why producing AP is actually more cost-efficient than producing SP due to advancements in technology and manufacturing processes but does not explain the results of the analysts' calculation
Incorrect

B. The production method for AP allows for faster output but the sale price for AP has traditionally been set higher due to perceived value.
We are not concerned with faster output and perceived value
Incorrect

C. The revenue generated from the higher-priced AP significantly exceeds the cost savings from its more efficient production compared to SP.
Revenues from sales of higher priced AP > Cost savings from its more efficient production compared to SP
Overall company profits will decrease if it combined the two product lines, offering its customers only the AP product at the price level of SP since decrease in revenue because of lower price of AP price of SP will be more than cost savings in production of AP.
Correct

D. The research and development costs for developing AP were recouped quickly due to initial high interest when it was first launched.
We are not concerned with research and development costs for developing AP
Incorrect

E. While AP is more cost-effective to produce, it requires more frequent updates and enhancements than SP.
We are not concerned with frequent updates and enhancements of AP vs SP.
Incorrect

IMO C