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

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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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New post 01 Aug 2019, 00:43
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?

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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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New post 01 Aug 2019, 04:20
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aalakshaya wrote:
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

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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)
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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New post 05 Aug 2019, 18:05
The plan is to reduce the #issues published by 50% in order to combat the increase in postage costs.

What will likely indicate that profits will decline?
D is correct because if advertisers are spending the same amount and they aren't INCREASING their advertising then the company forgoes the revenue it would have made from advertising on previously published issues (the other 50%).

A is incorrect - we are actually already told this, but we aren't told specifically. This just indicates that costs go up FRACTIONALLY, but we need to consider stronger impacts to profits - decreases in revenues equivalent to 50% of previously published issues as per A are significantly more damaging to the proposed plan.
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Re: Because postage rates are rising, Home Decorator magazine plans to max   [#permalink] 05 Aug 2019, 18:05

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