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.
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(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
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(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.
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(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.
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(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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07 Apr 2020, 06:02
45%
(medium)
35%
(02:11)
wrong 
