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At the beginning of 1994, Congress enacted a 10% increase in the feder
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Updated on: 17 Dec 2018, 20:04
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45% (medium)
Question Stats:
66% (01:27) correct 34% (01:50) wrong based on 229 sessions
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At the beginning of 1994, Congress enacted a 10% increase in the federal minimum wage. At that time, Charlesville Hotdog and Beef Company employed 4,000 employees, with over 90 percent of the workforce making minimum wage. Despite the fact that the increase in minimum wage increased the operating expenses of Charlesville Co., the company reported record profits at the end of 1994.
Which of the following, if true, most helps to resolve the apparent paradox?
A. Charlesville Co. spends more money procuring cows for their Hotdog and Beef products than they do paying their 4,000 workers.
B. Charlesville Co. also saw an increase in expenses other than its wages in 1994.
C. Before 1994, the company had considered giving its employees a 10% raise, but ultimately decided not to do so.
D. The company's customer base is made up primarily of families that rely on minimum wage incomes.
E. The majority of the company's 4,000 employees work in the company's meat-packing facilities.
Affiliations: CFA Institute (CFA Candiate), Canadian Institute of Chartered Accountants (CA Candiate), Chartered Alternative Investments Analysts Association (CAIA Candidate)
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Concentration: Finance, International Business
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Re: At the beginning of 1994, Congress enacted a 10% increase in the feder
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13 Aug 2011, 12:03
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Answer (D): While this isn't the clearest explanation, it's the most satisfactory. It can be conjectured that the rising incomes of the majority of the customer base allowed for the company to sell more of (or raise prices on) its products - thereby increasing the top line -> extending to the bottom line despite increases in expenses.
(A) This would make sense if we could conclude that the cost of procuring cows fell in the current year (and therefore total expenditures fell). However, there is no evidence to suggest that this is so. (B) While this may be true, it wouldn't negate the fact that increasing salary expenses would in theory lower net income. (C) This implies that the company could have planned for the rising expenditures, and adjusted accordingly. However, its too far a stretch to conclude that because the salary increases were budgeted for, it did not raise overall expenses (thereby lowering net income). (E) The implication is that most of these employees earn minimum wage - no new information provided.
My solution requires a knowledge of some basic supply/demand theory, which may make it incorrect, as the GMAT requires that you have no previous knowledge of the market or economics.
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Answer D - In the stimulus, we are told that Charlesville's profits increased markedly in 1994 despite the fact that an increase in the federal minimum wage increased the company's cost structure. In order to find a proper explanation to this apparent paradox, we must find an answer choice that allows us to show that Charlesville could have also enjoyed a simultaneous increase in revenue. Only choice (D) does this. It says that the customer base of Charlesville was newly flush with cash because of the increase in the federal minimum wage. Despite the company's higher costs, the change in the minimum wage would also have allowed for greater demand of the company's products.
Choice (A) may have been tempting for many students. However this choice only states that employee wages represent a minority of the company's costs. While this could mean that a decline in cow prices would offset the increase in wages, the statement does not go so far as to actually say that. It also does not contradict the evidence given to us that the company's operating expenses did indeed go up.
Choice (B) only further fuels the apparent paradox. If all expenses went up and profits went up, then only an increase in revenue could account for the higher profits.
Choices (C) and (E) are irrelevant. Neither the consideration of a raise prior 1994, nor the fact that most of the employees work in meat packing helps to explain the apparent paradox.
Re: At the beginning of 1994, Congress enacted a 10% increase in the feder
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04 Dec 2013, 05:21
DeeptiM wrote:
I chose D but need a better reasoning to rule out C.
Why cant we assume that the salary increases were budgeted? and the mandated increase from govt didn't really increase the overall expenses?
Here are the facts Minimum wage was increased by 10% , increasing operational costs Company had higher profits.
consider C: The fact that it "considered" a wage increase has no bearing. Even if you make the assumption that (which you shouldn't) this increase in wage was budgeted - how would you explain the fact that the company made "record sales". Option C just doesn't cut it!
Option D though suggests that the increase in wage essentially made the company's core customers richer (giving them more money to spend) and therefore possibly explains this scenario. Hope that helped
Re: At the beginning of 1994, Congress enacted a 10% increase in the feder
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02 Jan 2019, 10:34
bschool83 wrote:
At the beginning of 1994, Congress enacted a 10% increase in the federal minimum wage. At that time, Charlesville Hotdog and Beef Company employed 4,000 employees, with over 90 percent of the workforce making minimum wage. Despite the fact that the increase in minimum wage increased the operating expenses of Charlesville Co., the company reported record profits at the end of 1994.
Which of the following, if true, most helps to resolve the apparent paradox?
A. Charlesville Co. spends more money procuring cows for their Hotdog and Beef products than they do paying their 4,000 workers.
B. Charlesville Co. also saw an increase in expenses other than its wages in 1994.
C. Before 1994, the company had considered giving its employees a 10% raise, but ultimately decided not to do so.
D. The company's customer base is made up primarily of families that rely on minimum wage incomes.
E. The majority of the company's 4,000 employees work in the company's meat-packing facilities.
One of the worst questions I have ever seen. There is logic of course. But it has to be an overthinking to solve this question. I think good Oficial GMAT questions "do not like to do it"
Answer D - In the stimulus, we are told that Charlesville's profits increased markedly in 1994 despite the fact that an increase in the federal minimum wage increased the company's cost structure. In order to find a proper explanation to this apparent paradox, we must find an answer choice that allows us to show that Charlesville could have also enjoyed a simultaneous increase in revenue. Only choice (D) does this. It says that the customer base of Charlesville was newly flush with cash because of the increase in the federal minimum wage. Despite the company's higher costs, the change in the minimum wage would also have allowed for greater demand of the company's products.
Choice (A) may have been tempting for many students. However this choice only states that employee wages represent a minority of the company's costs. While this could mean that a decline in cow prices would offset the increase in wages, the statement does not go so far as to actually say that. It also does not contradict the evidence given to us that the company's operating expenses did indeed go up.
Choice (B) only further fuels the apparent paradox. If all expenses went up and profits went up, then only an increase in revenue could account for the higher profits.
Choices (C) and (E) are irrelevant. Neither the consideration of a raise prior 1994, nor the fact that most of the employees work in meat packing helps to explain the apparent paradox.
But, a raise in the minimum wage of those customers does not imply necessarly a raise in thir purchases !!!
gmatclubot
Re: At the beginning of 1994, Congress enacted a 10% increase in the feder
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20 Jan 2019, 02:58
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66% (01:27) correct 
