A Pen manufacturing company, SmartPens Ltd, has designed a new technol : Multi-Source Reasoning

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ECSUN345

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Re: A Pen manufacturing company, SmartPens Ltd, has designed a new technol [#permalink]

05 Mar 2022, 11:14

zhanbo wrote:

Question 1：
Company A - 0.56/Unit
Company B - 0.61/Unit

For company A: Each unit costs 0.5+0.02=0.52
Its defective rate is 7.5%.
Order size does not change ultimate unit price, so just think of 100 pens.
(100 * 0.52)/92.5=0.562...

For company B whose defective rate is 2%.
(0.60*100)/98 = 0.612...

Question 2：My answer is (B) 10 months.
The expected sale is around 10K units for the first month, increasing by 10K units every month.
Company A has a maximum monthly spare capacity for production of 50K pens.
Company B has a maximum monthly spare capacity for production of 100K pens.

At first, I thought the answer is 15 because both companies can be tapped. There is no answer choice of 15.
So, SmartPens can only pick one company. Company B it is.

Question 3: My answer is (C). This one is a bit tricky as we have very limited information about the scenario.
(A) How higher than initially estimated? If just 1% higher, there should be be the cause of alarm. If 100% higher, maybe. I eliminate (A) for the lack of clarity.
(B) Very attractive as it would reduce lost sales by 7k. But my reading is that the company is more concerned with higher investment for an untested tech: "The company fears that such a high upfront investment for an untested technology could be a big risk and may get rejected by the board." So the accelerated ramp-up time, while definitely a positive, may not be the game-changer.
(C) If the demand is more assured, the company's investment is well-justified. Even if they outsource to either company A or B, they still have to produce pens in-house after 10 months at most.
(D) How much more? Not a big deal if it is just 0.01 cent more per pen. Plus, this is new tech (with patent protection I assume). How can A quote the same produce for another company? Besides, an alternative option can be company B, not necessarily own factory.
(E) Can be easily eliminated as it helps justify outsourcing options.

Could you please explain your answer for question #2? This part of the question, "The expected sale is around 10K units for the first month, increasing by 10K units every month." made me think that in Month 1 we'd sell 10K units, Month 2 - 20K, Month 3 - 30K, Month 4 - 40K etc. I'm not understanding how to relate Company B's capacity to this question.

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Re: A Pen manufacturing company, SmartPens Ltd, has designed a new technol [#permalink]

05 Mar 2022, 13:29

Sajjad1994 wrote:

Competition mode is off now

OAs are:

Question #1

Company A: 0.56/Unit
Company B: 0.61/Unit

Question #2

C

Question #3

C

Can you explain question 2 a bit further?

Now I think about it further: Company B should be smart enough to manufacture at maximum capacity from the first month. This will generate excessive supply for months later (beyond month 10) when the market demand is higher than maximum capacity.

If this strategy is adopted, company B can supply enough pens for as long as 19 months.

zhanbo

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Re: A Pen manufacturing company, SmartPens Ltd, has designed a new technol [#permalink]

05 Mar 2022, 13:31

ECSUN345 wrote:

zhanbo wrote:

Question 1：
Company A - 0.56/Unit
Company B - 0.61/Unit

For company A: Each unit costs 0.5+0.02=0.52
Its defective rate is 7.5%.
Order size does not change ultimate unit price, so just think of 100 pens.
(100 * 0.52)/92.5=0.562...

For company B whose defective rate is 2%.
(0.60*100)/98 = 0.612...

Question 2：My answer is (B) 10 months.
The expected sale is around 10K units for the first month, increasing by 10K units every month.
Company A has a maximum monthly spare capacity for production of 50K pens.
Company B has a maximum monthly spare capacity for production of 100K pens.

At first, I thought the answer is 15 because both companies can be tapped. There is no answer choice of 15.
So, SmartPens can only pick one company. Company B it is.

Question 3: My answer is (C). This one is a bit tricky as we have very limited information about the scenario.
(A) How higher than initially estimated? If just 1% higher, there should be be the cause of alarm. If 100% higher, maybe. I eliminate (A) for the lack of clarity.
(B) Very attractive as it would reduce lost sales by 7k. But my reading is that the company is more concerned with higher investment for an untested tech: "The company fears that such a high upfront investment for an untested technology could be a big risk and may get rejected by the board." So the accelerated ramp-up time, while definitely a positive, may not be the game-changer.
(C) If the demand is more assured, the company's investment is well-justified. Even if they outsource to either company A or B, they still have to produce pens in-house after 10 months at most.
(D) How much more? Not a big deal if it is just 0.01 cent more per pen. Plus, this is new tech (with patent protection I assume). How can A quote the same produce for another company? Besides, an alternative option can be company B, not necessarily own factory.
(E) Can be easily eliminated as it helps justify outsourcing options.

Could you please explain your answer for question #2? This part of the question, "The expected sale is around 10K units for the first month, increasing by 10K units every month." made me think that in Month 1 we'd sell 10K units, Month 2 - 20K, Month 3 - 30K, Month 4 - 40K etc. I'm not understanding how to relate Company B's capacity to this question.

Evidently I got it wrong. Let's wait for the OA.

Your understanding is correct: First month 10k; Second month 20k, Month 10-100k.
Company B (or A) must manufacture enough pens to satisfy the ever-higher market.

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Re: A Pen manufacturing company, SmartPens Ltd, has designed a new technol [#permalink]

05 Mar 2022, 13:43

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Explanation

1. What is the overall cost per working unit for SmartPens Ltd from each of the companies A and B, assuming an order size of 10K units and that the defective units are thrown away by SmartPens Ltd? Make only two selections - one in each column

Overall cost for Company A

Initial cost = 0.5/unit
Transportation cost = 0.02
Total cost per unit = 0.52

Total cost of 10K units = 5200

Now minus the defective pieces = 10,000 - 750 = 9250

So basically 5200$ cost is for 9250 units that becomes 5200/9250 = 0.562 = 0.56

Overall cost for Company B

Initial cost = 0.6/unit
Transportation cost = 0
Total cost per unit = 0.60

Total cost of 10K units = 6,000

Now minus the defective pieces = 10,000 - 200 = 9800

So basically we 6000$ cost is for 9800 units that becomes 6000/9800 = 0.612 = 0.61

Answer:

Company A: 0.56/Unit
Company B: 0.61/Unit

2. Assuming that the company’s demand meets projections, what is the maximum number of months that the company can wait before it needs to start building its own factory?

This question asks about what maximum time a company can go for outsourcing and not starting its own plant.

Company A's plant capacity is 50K units so if SmartPens Ltd. go with company A it can only keep itself from starting its own plant for just five months but if it goes with company B that has a plant capacity of 100K units company can go for as long as 10 months so for a maximum time company can go with the outsourcing option for 10 months

Answer: B

3. Which of the following statements, if true, would most strongly motivate SmartPens to start investing in its own production unit from the beginning?

A. Defect rate for Company A and Company B products are higher than initially estimated

We don't have enough data about the actual defect rates so we can not say anything with surety. This is an example of a could be true answer choice while we are looking for a must be true answer choice

B. Development of new unit would take around two months, instead of four months as initially thought.

An upfront payment that is needed for the start of the plant is the main issue of concern as we are not looking for the time period.

C. An initial survey by a well-respected company has suggested strong demand for the new pen.

A strong demand suggests that the demand would be far greater than speculated so this must be a deciding factor for the company to go for its plant. The company is hesitant to start the plant in the event of no demand, so if there is no issue with the demand of the pen then the company will go for its own plant rather sourcing it out.

D. Company A charges less per-unit to other customers than its quote for SmartPens.

This is the opposite.

E. Company A and Company B are trusted producers of pens for over a decade.

This is also the opposite.

Answer: C

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Re: A Pen manufacturing company, SmartPens Ltd, has designed a new technol [#permalink]

05 Mar 2022, 13:47

Expert Reply

zhanbo wrote:

Sajjad1994 wrote:

Competition mode is off now

OAs are:

Question #1

Company A: 0.56/Unit
Company B: 0.61/Unit

Question #2

C

Question #3

C

Can you explain question 2 a bit further?

Now I think about it further: Company B should be smart enough to manufacture at maximum capacity from the first month. This will generate excessive supply for months later (beyond month 10) when the market demand is higher than maximum capacity.

If this strategy is adopted, company B can supply enough pens for as long as 19 months.

We cannot assume the above highlighted on our own, we have to keep ourselves within the boundaries of the question data. Thinking so will go outside of the scope. The answer given in the source is C and I assume this might be a typo as I am unable to find any logic that supports C.

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Re: A Pen manufacturing company, SmartPens Ltd, has designed a new technol [#permalink]

26 Apr 2024, 06:29

ECSUN345 wrote:

zhanbo wrote:

Question 1：
Company A - 0.56/Unit
Company B - 0.61/Unit

For company A: Each unit costs 0.5+0.02=0.52
Its defective rate is 7.5%.
Order size does not change ultimate unit price, so just think of 100 pens.
(100 * 0.52)/92.5=0.562...

For company B whose defective rate is 2%.
(0.60*100)/98 = 0.612...

Question 2：My answer is (B) 10 months.
The expected sale is around 10K units for the first month, increasing by 10K units every month.
Company A has a maximum monthly spare capacity for production of 50K pens.
Company B has a maximum monthly spare capacity for production of 100K pens.

At first, I thought the answer is 15 because both companies can be tapped. There is no answer choice of 15.
So, SmartPens can only pick one company. Company B it is.

Question 3: My answer is (C). This one is a bit tricky as we have very limited information about the scenario.
(A) How higher than initially estimated? If just 1% higher, there should be be the cause of alarm. If 100% higher, maybe. I eliminate (A) for the lack of clarity.
(B) Very attractive as it would reduce lost sales by 7k. But my reading is that the company is more concerned with higher investment for an untested tech: "The company fears that such a high upfront investment for an untested technology could be a big risk and may get rejected by the board." So the accelerated ramp-up time, while definitely a positive, may not be the game-changer.
(C) If the demand is more assured, the company's investment is well-justified. Even if they outsource to either company A or B, they still have to produce pens in-house after 10 months at most.
(D) How much more? Not a big deal if it is just 0.01 cent more per pen. Plus, this is new tech (with patent protection I assume). How can A quote the same produce for another company? Besides, an alternative option can be company B, not necessarily own factory.
(E) Can be easily eliminated as it helps justify outsourcing options.

Could you please explain your answer for question #2? This part of the question, "The expected sale is around 10K units for the first month, increasing by 10K units every month." made me think that in Month 1 we'd sell 10K units, Month 2 - 20K, Month 3 - 30K, Month 4 - 40K etc. I'm not understanding how to relate Company B's capacity to this question.

I also understood the question like this only, first month 10k ; second month 20k and so on. @Sajjad1994 is this interpretation wrong? Isn't it written that the monthly sale is increasing by 10k units every month?

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Re: A Pen manufacturing company, SmartPens Ltd, has designed a new technol [#permalink]

26 Apr 2024, 06:29

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