A company with long-outstanding bills owed by its customers can assign

Question

A company with long-outstanding bills owed by its customers can assign those bills to a collection agency that pays the company a fraction of their amount and then tries to collect payment from the customers. Since these agencies pay companies only 15 percent of the total amount of the outstanding bills, a company interested in reducing losses from long-outstanding bills would be well advised to pursue its debtors on its own.

The argument depends on the assumption that

(A) a company that pursues its debtors on its own typically collects more than 15 percent of total amount of the long-outstanding bills that it is owed

(B) the cost to a company of pursuing its debtors on its own for payment of long-outstanding bills does not exceed 15 percent of the total amount of those bills

(C) collection agencies that are assigned bills for collection by companies are unsuccessful in collecting, on average, only 15 percent of the total amount of those bills

(D) at least 15 percent of the customers that owe money to companies eventually pay their bills whether or not those bills are assigned to a collection agency

(E) unless most of the customers of a company pay their bills, that company in the long run will not be profitable

David nguyen · Answer

A company with long-outstanding bills owed by its customers can assign those bills to a collection agency that pays the company a fraction of their amount and then tries to collect payment from the customers. Since these agencies pay companies only 15 percent of the total amount of the outstanding bills, a company interested in reducing losses from long-outstanding bills would be well advised to pursue its debtors on its own.

The argument depends on the assumption that

Conclusion: A company interest in reducing losses from long-outstanding bills would be well advised to pursue its debtors on its own.
Conclusion depends on the premise that these agencies pay companies only 15% of the total amount of the outstanding bills.

What is the author assuming here?

Company will be better off than get paid 15% of the total amount from the collection agency. How could the company be better off? It must be the case that It is able to collect from the customer with the total amount greater than 15% of the total amount of the outstanding bills after deducts all collecting-related cost.

Quote:

(A) a company that pursues its debtors on its own typically collects more than 15 percent of total amount of the long-outstanding bills that it is owed

This is similar to our thought. Let's keep it for now.

Quote:

(B) the cost to a company of pursuing its debtors on its own for payment of long-outstanding bills does not exceed 15 percent of the total amount of those bills

Hmmm. This one talks about cost which is mentioned in our thought as well. Let's analyze it further.

So, this says that the cost does not exceed 15% of the bills. Is the argument assuming this? What if the cost exceeds 15% of the total amount of the bills but the average collected amount is 50% of the outstanding bills? Net received amount = 50% - 15% = 35%. This is still greater than 15%. So B is not assumed

Quote:

(C) collection agencies that are assigned bills for collection by companies are unsuccessful in collecting, on average, only 15 percent of the total amount of those bills

Ok. The agencies are unable to collect only 15% of the total amount of those bills. Does that mean on average, the collection agencies are successful in collecting 20%, 50%, 80%, or even 5%? This statement is unclear.
Also, Let's say that the agency is able to collect only less than 15% and the company is able to collect 20%. Does that mean the company will be better off? No, what if the cost of collecting exceeds 20%, then the company will actually lose money. If my company is losing money by doing so, I would rather hiring the collecting agencies. Some money back, Less stress. For that reason, C is out.

Quote:

(D) at least 15 percent of the customers that owe money to companies eventually pay their bills whether or not those bills are assigned to a collection agency

Let's take an extreme case.
Out of 100 customers, at least 15 of them will pay no matter what. What's wrong here? let's say the total amount that must be collected from those 100 customers is 1 million dollars. 15% of them owe only $100 each, totaling to $1500; how about 50% of them each owe only $100? The total is just $5000— The averages of each case are 0.0015% and 0.5% respectively. However, If the agency can collect 15% on average then the total amount of 15% of 1mil, which is $150,000. The company is way better off using the collecting agencies' services.

Quote:

(E) unless most of the customers of a company pay their bills, that company in the long run will not be profitable

The argument only concerns whether the company is better doing the collecting itself or hiring the collecting agency. Company's long run profitability is out of scope.

Only A is left. A is the correct answer.

P/S: My exam got cancelled because of Coronavirus and the next exam will not be available till July. This is not even guaranteed since California condition is uncertain. Would anyone kindly give me some advise

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desertEagle · Answer

In A, what if the collection exceeds 15% (take 20%) but cost of collection exceeds collection (say cost of collection is 10%). Then how can we justify this statemtent? Because now we are only getting 10% of OS but the company was giving 15%.

Kindly explain @TargestTestPrepMarty  GMATNinja   KarishmaB

KarishmaB · Answer

Think about it this way - An assumption is the bare minimum that is necessary. If it is not true, then the conclusion breaks.

Now if I get to know that the company can obtain 15% by selling off their dues to an agency but I insist that the company should collect their dues themselves, obviously I expect the company to be able to collect more than 15% at the bare minimum. Hence, I am assuming that it will be able to collect more than 15% for sure. Now, I do expect it to collect more than 15% in profit, so to say i.e. Revenue collected - Cost of collection, but one thing is for sure that for "profit" to be more than 15%, the revenue has to has to be more than 15%. 
And hence, option (A) certainly works as an assumption. Mind you, the assumption doesn't need to "prove" that self collection is better.

Answer (A)

nikkimah · Answer

(B) the cost to a company of pursuing its debtors on its own for payment of long-outstanding bills does not exceed 15 percent of the total amount of those bills

The company is interested in reducing losses from the o/s bills. So, we would like to recover as much amount from the o/s bills even if the cost of the collection is high? Hence, B option choice is wrong. 
I can relate this to the corporate world, for ex - the cost of marketing the product is higher comparatively to the revenue generated by the product. However, the marketing cost is accounted separately and we will right now consider how much revenue the product generate Month on month? Is this the correct understanding?

GMATNinja  @VeritasKarishma 
Thanks

siddharth_ · Answer

Still unable to grasp, how would A ensure the 'reduction in losses'? What if the company can collect 15% but the cost associated is 20%, then isn't it better off using the collection companies?

MartyMurray · Answer

(A) does not "ensure the 'reduction in losses.'"

At the same time, in this case, what the correct answer must do is not prove the conclusion correct.

Rather, the correct answer must state an assumption on which the argument depends, in other words, something that must be true for the argument to work.

Here's the conclusion of the argument:

a company interested in reducing losses from long-outstanding bills would be well advised to pursue its debtors on its own

The support for the conclusion is the following premise:

these agencies pay companies only 15 percent of the total amount of the outstanding bills

We see that the reasoning of the argument is basically that, since collection agencies pay only 15 percent, a small percentage of the outstanding bills, a company should pursue debtors on its own.

Notice that, for that argument to work, AT A MINUMUM, a company that pursues debtors on its own must collect over 15 percent of the total amount outstanding. Otherwise, it would not make sense financially for the company to pursue the debtors on its own.

So, to support its conclusion that it makes sense for a company to do its own debt collection, the argument requires the assumption that, as (A) says,  a company that pursues its debtors on its own typically collects more than 15 percent of total amount of the long-outstanding bills that it is owed  .

After all, if (A) is not true, then the argument falls apart.

ahddhah · Answer

Anyone confused between A and B, I would request focus on the point that we are trying to reduce not the overall loses but the loses from the outstanding bill and then the question is fairly simple.

A company with long-outstanding bills owed by its customers can assign

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A company with long-outstanding bills owed by its customers can assign

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