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Difficulty:
35%
(medium)
Question Stats:
71% (01:30) correct
29%
(01:46)
wrong
based on 1010
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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.
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.
Sovjet
Joined: 21 Jun 2011
Last visit: 23 May 2012
Posts: 17
Given Kudos: 1
Affiliations: CFA Institute (CFA Candiate), Canadian Institute of Chartered Accountants (CA Candiate), Chartered Alternative Investments Analysts Association (CAIA Candidate)
Location: Canada
Concentration: Finance, International Business
WE:Research (Finance: Investment Banking)
13 Aug 2011, 13:03
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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.
(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.
13 Aug 2011, 22:53
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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?
Why cant we assume that the salary increases were budgeted? and the mandated increase from govt didn't really increase the overall expenses?
