Because postage rates are rising, Home Decorator magazine plans to max

D

...Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year. .....

(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past.

Therefore, annual revenue from advertisement will halve.

This is a clear D
(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.-> irrelevant, eliminate it
(B) The majority of the magazine’s subscribers are less concerned about a possible reduction in the quantity of the magazine’s articles than about a possible loss of the current high quality of its articles.-> quality of articles would remain same so this is not an issue,eliminate it

(C) Many of the magazine’s long-time subscribers would continue their subscriptions even if the subscription price were increased.-> this would actually increase the profits, however increase of price is not the questions, thus irrelevant, eliminate it

(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past.->Thus if the company reduces the # of magazines per year to 1/2 then the company clearly loosed 1/2 of the revenue generated on the advertising,

(E) Production costs for the magazine are expected to remain stable.-> irrelevant, eliminate it

The answer to this question is D:

The question stem is a little tricky because it is actually a weaken question, but the initial wording may appear to be a strengthen question.

A. If postage rates only increased by 1/3 and the number of issues is reduced by 1/2, this means that the company will still have cost savings. Therefore, this will not lead to a decrease in profits.

B. This is irrelevant. Whether individuals are concerned about quantity or quality of the magazine does not appear to affect the profits of the company.

C. This presents only a hypothetical situation. Therefore, we are not sure how this would actually affect the profits at all.

D. This is the correct answer. The reason is because if the advertising amount is the same per issue and the number of issues has decreased by 1/2, then the company is losing 1/2 the advertising revenue. This could result in decreased profits.

E. If production costs are stable, and the subscription price has not changed, there is no reason to believe that profits will change at all.

Hi
I chose E . My reasoning was that if the production costs remained the same even with the number of issues reduced then how can the magazine make a profit

We know from the initial statement that the revenue will remain constant. If the production cots remain constant as well we can conclude that the profit will stay the same.
The question asks us to find an answer that shows why profits will decline. Therefore E doesn't give a reason why the profit should decline.

Hope that helps

Hi, can someone explain why option E is wrong? If we look at the equation "Profit per unit = Revenue per unit- Production cost per unit, we can see that if the per unit cost of production increases, then our per unit profit shall decrease.

Keeping this in mind, if the overall production cost remains stable (same) but the units produced are less, won't the per unit cost of production increase?

That would lead to lesser profit per unit and therefore, lesser overall profit.

Am I missing something?

GMATNinja bb VeritasKarishma

Posted from my mobile device

You are assuming that fixed cost will remain the same. Production costs mentioned in (E) could very well be "cost per issue" which is expected to remain stable. If you really think about it, most costs of magazine production would be variable cost (amount paid to writers per article, cost of printing the magazine, cost of postage etc). These will be incurred when an issue is printed.
The intent of (E) is to say that the costs are not going to increase.

(D) on the other hand, says that advertisers will spend the same amount per issue as before. So fewer issues will mean less revenue from advertisers. So even though advertisers will not be lost, there will be less money coming from them.

Answer (D)

I believe answer A, that sending will be more expensive, is also possible answer. However, key is that it is not a "Must be true" statement, in my opinion.

Because postage rates are rising, Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year. The quality of articles, the number of articles published per year, and the subscription price will not change. Market research shows that neither subscribers nor advertisers will be lost if the magazine's plan is instituted.

Which of the following, if true, provides the strongest evidence that the magazine's profits are likely to decline if the plan is instituted?

Question type: Strengthen the argument

Conclusion: The magazine will face losses if the number of issues is cut down by half.

Task at hand: Find an option that shows that reducing the number of issues will cause loses.

A. With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would. That it costs more to mail wont be a problem because the number of issues that need to be mailed has been cut down by half.

B. The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles. The concern of the subscribers will not help strengthen the conclusion.

C. Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased. If long-time subscribers would continue their subscriptions even if the subscription price were increased, then there will not be any losses.

D. Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past. Let’s suppose the advertisers spent $100 per issue and there were 12 issues originally. That means, with the reduction in the number of issues, the magazine will only get $600. This is a loss for the magazine. This strengthens.

E. Production costs for the magazine are expected to remain stable The fact that the production costs are going to be stable does not mean that the magazine will face losses.

- Nitha Jay

Options B and C are going against the facts mentioned in the argument itself. So, both of them are irrelevant.
When options provide new information that contradicts what is given in the paragraph, can we assume that what is given must be true and determine that the options are just irrelevant?

To simplify:
Profit=Revenue-Cost
Revenue=Revenue from sales+Revenue from advertisements
Cost=Costs of production + Costs of shipping
Since the subscription price will not change,the revenue from sales will remain unchanged
The cost of shipping is reduced by half because the no of issues are reduced by half.
To reduce profits,costs should increase more than revenue

(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.- If the no of issues are reduced by half,considering all other factors unchanged,the postage costs would have to more than double to make the magazine less profitable than it was previously,
(B) The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles.-Wont decline profit as the consumers are not worried about declining issues
(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.- This gives the magazine company a chance to increase profits by increasing revenue from sales
(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past.-Revenue from ads will decrease, causing profits to decrease.
(E) Production costs for the magazine are expected to remain stable- If production costs are stable and shipping costs decrease,it would lead profits to increase for a given revenue.

Postage cost will increase + half the issues => reduction in profits from subscription. (This is fact as per the question)

What can vary is advertisement revenue and hence the option confirming advertisement profits will be the right answer. Otherwise there are chances of improvement in advertisement profits.

Understanding the argument -
Goal - Maximize profit. Profit = Revenue - Cost. How can we maximize profits? Either we increase revenue or reduce cost? How do we check that we have maximized our profit? If we have to make a revenue of $100 to make $1 as profit vs. another scenario if we can make a profit of $2 per 100 of revenue. The second scenario is preferred to maximize our profit for the given revenue. Profits/revenue may be a good yardstick to check if we have maximized our profits (for the sake of our understanding) other than the absolute numbers.

Plan - Reduce the number of issues by 50%.

So our job is to show that that the profits will decline. P = R-C. So profits can decline if revenues go down or cost increases.

Let's take an example -
Old Situation -
No. of magazines sold earlier - 100
Postage per magazine $6
So total postage cost = $600

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*100)+5000 = $7000

Profits = $7000-$600 = $6400

So our profitability is $6400/$7000 = 91.42%

Now, as per the new plan, we reduce the number of units by 50%
Scenario 0 - Advertisement revenue is fixed - Best case scenario.
No. of magazines sold now - 50
Postage per magazine $6 (same)
So total postage cost = $300

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*50)+5000 = $6000

Profits = $6000-$300 = $5700
So our profitability is $5700/$6000 = 95%


Scenario 1 - Advertisement revenue is fixed (To evaluate option 1 in the choices)
No. of magazines sold now - 50
Postage per magazine $8 (increase by 1/3)
So total postage cost = $400

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*50)+5000 = $6000

Profits = $6000-$400 = $5600

So our profitability is $5600/$6000 = 93.3% (The catch here is that since we reduced the postage cost by 50%, even if the postage cost increases by 33%, we still have a buffer of 17% to play, and while the profitability will be lower than the best case scenario, it'll still be higher than the old situation.


Scenario 2 - Advertisement revenue is per unit ($50 per unit) - To evaluate option D in the choices
No. of magazines sold now - 50
Postage per magazine $6 (stays same)
So total postage cost = $300

Revenue per subscription = $20
Advertisement revenue = $2500
Total revenue = (20*50)+2500 = $3500

Profits = $3500-$300 = $3200

So our profitability is $3200/$3500 = 91.42%


(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would. - If we compare the Old situation (91.42%) and Scenario 1 (93.3%). Scenario 1 is actually better (93.3%) in maximizing profits. We can't do this much in the exam, so another quick way is as we reduced the cost by 50% and now increased it by 33%, we still have a cushion of 17%. This will be a better situation. It's a strengthener and not a weakener that we are looking for.

(B) The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles. - But the argument says that the quality will remain the same. Distortion.

(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased. - The argument said that the subscription will remain the same. Distortion.

(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past. This is our Scenario 2 (91.42%). The absolute profits have not only reduced w.r.t. new plan (Scenario 0), but the profitability is also lower. As per the new plan, the profits should be $5700, but if advertising is per issue, the profits plummet to $3200. The trap words here in the argument are "Market research shows that no advertisers will be lost if the magazine's plan is instituted." But the deception here is okay; the number of advertisers can remain the same, but will their spending remain the same? That's what this option exposes.

(E) Production costs for the magazine are expected to remain stable - It's good if they remain stable. But if they are unstable, it'll likewise impact the old situation and new plans.

Let's plug the numbers for our understanding
Old Situation (including production cost)
No. of magazines sold earlier - 100
Postage per magazine $6
So total postage cost = $600

The production cost per magazine $5
Production cost for 100 magazines - $500

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*100)+5000 = $7000

Profits = $7000-$600-$500 = $5900

So our profitability is $5900/$7000 = 84.2%

Now, as per the new plan, we reduce the number of units by 50%
Scenario 3 - Advertisement revenue is fixed - Best case scenario.
No. of magazines sold now - 50
Postage per magazine $6 (same)
So total postage cost = $300

The production cost per magazine is $5
Production cost for 50 magazines - $250

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*50)+5000 = $6000

Profits = $6000-$300 - $250= $5450
So our profitability is $5450/$6000 = 90%

The new plan is still better as this option impacts both scenarios equally. At best, this is a distortion.

Now, is it required to do so many calculations in the exam? No way. But when we are practicing, let's get to the depth of the problem so that, hopefully, we can think in the right direction when we see such complex arguments.