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

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

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Updated on: 07 Nov 2018, 05:01
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64% (02:04) correct 36% (02:23) wrong based on 3180 sessions

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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?

(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.

(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.

(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.

(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.

(E) Production costs for the magazine are expected to remain stable

Originally posted by u2lover on 13 Aug 2006, 16:32.
Last edited by Bunuel on 07 Nov 2018, 05:01, edited 1 time in total.
Renamed the topic and edited the question.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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20 May 2018, 15:54
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Masterscorp wrote:
Superg8 wrote:
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

The main concern here is rising shipping costs (postage rates). All else equal, if shipping costs have increased, then overall profits must have decreased. In other words, if revenues, production costs, and other costs have remained constant but SHIPPING costs have increased, then profits have decreased.

How can we can we decrease our shipping costs? By cutting the number of issues per year in half. That will immediately cut our shipping costs in half, even if, as stated in (E), production costs remain stable. So even if (E) is true, if we cut our shipping costs in half and revenue remains constant, we can boost our profits. Thus, (E) can be eliminated.

(D), on the other hand, tells us that if we cut the number of issues in half, then the our revenue from advertising will also be cut in half. Sure, we don't know what percentage of overall revenue comes from advertising, but this is strong evidence that cutting the number of issues in half will hurt our bottom line. (D) is a better answer.

I hope that helps!
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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08 Aug 2008, 19:00
5
spriya wrote:
abhijit_sen wrote:
IMO D. If advertisers still spend same amount per issue, then advertising revenue will go down.

Why not A ,since A also affects the profit?

Because of increase in postal rates company has devised the plan to reduce issues into half. So this part is already covered.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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14 Mar 2008, 21:53
3
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
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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14 Mar 2008, 11:41
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1
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.

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

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08 Aug 2008, 18:33
1
abhijit_sen wrote:
IMO D. If advertisers still spend same amount per issue, then advertising revenue will go down.

Why not A ,since A also affects the profit?
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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04 Apr 2010, 06:47
1
Good question.
If you don't read well enough you might miss the ad revenue/issue, and then A looks a good choice.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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25 Mar 2012, 09:15
1
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.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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05 May 2013, 09:53
1
unstoppable wrote:
A small doubt regarding the same:

What is the logic behind cutting down the number of edition in a year?

1) If there were 12 editions and subscribers paid 2 \$ per ediiton , the revenue is 24 \$.
2) Now when the number is cut to 6, the revenue becomes only 12 \$. I mean why will a subscriber pay the same rate when the number of issues he is getting is halved?

So even if the subscribers remain constant, aren't the revenues falling?
The answer revolves around reduction in ADs income, which agree with definitely. But what about the above discrepancy?

Also in the Option A ..If say he is publishing 100 issues earlier and now has reduced to 50.
Say, postal rates were 1 per issues earlier and now they are 4/3.
So, total cost of sending 50 is around 66.67 and sending 100 with earlier rates is 100.

Now say per subscription(per issue) he earns \$1 so total earlier was \$100 on \$100 while now its \$50 on \$66.67 investment.

So, even here the Profit is declining.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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07 May 2013, 00:21
1
prashant3161 wrote:
unstoppable wrote:
A small doubt regarding the same:

What is the logic behind cutting down the number of edition in a year?

1) If there were 12 editions and subscribers paid 2 \$ per ediiton , the revenue is 24 \$.
2) Now when the number is cut to 6, the revenue becomes only 12 \$. I mean why will a subscriber pay the same rate when the number of issues he is getting is halved?

So even if the subscribers remain constant, aren't the revenues falling?
The answer revolves around reduction in ADs income, which agree with definitely. But what about the above discrepancy?

Also in the Option A ..If say he is publishing 100 issues earlier and now has reduced to 50.
Say, postal rates were 1 per issues earlier and now they are 4/3.
So, total cost of sending 50 is around 66.67 and sending 100 with earlier rates is 100.

Now say per subscription(per issue) he earns \$1 so total earlier was \$100 on \$100 while now its \$50 on \$66.67 investment.

So, even here the Profit is declining.

actually, (a) actually STRENGTHENS the conclusion

here's HOW:
they're only going to send out half as many issues. therefore, unless the cost of postage doubles, they're actually going to spend less money on postage than they did before.

choice (a) says that postage will cost only 1/3 more - far less than double. therefore, choice (a) actually implies that the total cost of postage will go down. this is exactly the opposite of what you want.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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19 May 2018, 01:12
1
Superg8 wrote:
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
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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01 Aug 2019, 03:20
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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?

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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.

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

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08 Aug 2008, 10:46
IMO D. If advertisers still spend same amount per issue, then advertising revenue will go down.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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29 Mar 2013, 04:45
A small doubt regarding the same:

What is the logic behind cutting down the number of edition in a year?

1) If there were 12 editions and subscribers paid 2 \$ per ediiton , the revenue is 24 \$.
2) Now when the number is cut to 6, the revenue becomes only 12 \$. I mean why will a subscriber pay the same rate when the number of issues he is getting is halved?

So even if the subscribers remain constant, aren't the revenues falling?
The answer revolves around reduction in ADs income, which agree with definitely. But what about the above discrepancy?

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

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29 Apr 2017, 07:26
Here is the important stuff:

1. The magazine is cutting the number of issues in half because of postage rates
2. The price will not change, the magazine will be larger, and quality remains the same.
3. No subscribers or advertisers will be lost

We want to know why their profits will decline despite these factors.

A. Incorrect. If the postage rises by 1/3 but they are cutting the number of issues in half they are going to lower their total postage costs over what they were the year before. Lower costs should mean higher, not lower profit.

B. Incorrect. The readers dont want to lose quality. The magazine is going to keep the same quality. That should mean that the readers will stay on board and continue to pay the cost, thus there will be no loss of profit.

C. Incorrect. This just tells us that if they increased the price people would still buy it. It has nothing to do with the current plan to keep the price the same nor indicates any reason profit will fall.

D. Correct. Lets use an example to illustrate: If advertisers used to spend \$10 per issue in ads and there were 12 issues per year, each advertiser provided revenue of \$120 to the magazine. Now the magazine is only going to produce 6 issues. If the ad revenue remains the same at \$10 per issue the ad revenue generated is only going to be \$60. That is a loss and gives evidence that profits will decline.

E. Incorrect. Nothing here would make us think profits would fall.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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08 Aug 2017, 20:49
******GOOD QUESTION******

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.

Thorough explanation of the above argument : --
*Magazines Issue is equivalent to a newsletter, publication, edition etc..
**Postage rate is amount of money charged by a governmental postal service to ship and deliver mail.
Scenario - Suppose a magazine publishes 12 issues/publications/newsletters per year, so now it will publish 6 issues/publications/newsletters per year. Reason - postage rates are rising, and Home Decorator magazine plans to maximize its profits.
What about the other things?? Will REMAIN SAME. (The quality of articles, the number of articles published per year, and the subscription price will not change. )
Alert - Don't confuse yourself with the difference between the issues and the articles. As I did when I first attempted this question.
Conclusion - Plan is good. Question - Plan is bad??

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

CONCLUSION -- IF PLAN IS INSTITUTED, THE PROFITS ARE LIKELY TO DECLINE. Therefore, the plan is bad.

PROFITS = REVENUE - COSTS.
i. Profits will decline if the COSTS GO UP SUBSTANTIALLY
ii. Profits will increase if the REVENUE GOES UP SIGNIFICANTLY

(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.
This option is talking about the mailing costs;
current postage rate - \$3
new postage rate - \$4 (as per this option details)

Issues earlier (suppose as) - 10, therefore, Mailing cost -- 10*3 = 30
Issues now (will be half) - 5 -- Mailing cost -- 5*4 = 20
Thus, the cost is getting reduced itself. Therefore, the profits will increase instead, keeping the revenue same.

Explanation by RON,
they're only going to send out half as many issues. therefore, unless the cost of postage doubles, they're actually going to spend less money on postage than they did before.

choice (a) says that postage will cost only 1/3 more - far less than double. therefore, choice (a) actually implies that the total cost of postage will go down. this is exactly the opposite of what you want.

it may help to set specific numbers to the values in question.
let's say that they currently send out 10 issues per year, and that postage currently costs \$3 per issue.
this is a total cost of \$30 for postage.

if they cut the number of issues in half, to 5, than the postage would have to double (to \$6/issue) to amount to the same total of \$30.

if the postage increase is only 1/3, then the cost of postage per issue will only rise to \$4. if only five issues per year are then sent out, the total cost of postage will fall from its original value (\$30) to a new value of 5 x \$4 = \$20.

(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 magazine's subscribers concerns are valid and they need to be rest assured that there will no loss of the current high quality, as it is directly mentioned in the argument that quality will not change. So, incorrect. Also, this does not proves why the plan is bad.

(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.
This option statement answers the what if scenario. But the subscription price will not change as per the argument. So we are not concerned about this scenario. Its irrelevant.
Also, this option does not proves why the plan is bad.

Options B and C are going against the facts mentioned in the argument itself. So, both of them are irrelevant.

(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.
Home Decorator magazine’s profits would be likely to decline if, as a result of instituting the plan, revenues were to decrease substantially. Choice D indicates that the plan would produce substantially lower revenues because most advertisers will pay the magazine the same amount per issue, but there will be only half as many issues. Therefore, D is the best answer
Earlier Scenario -
No. of Issues per year - 12
postage rates per issue - \$3
amount on advertising per issue earlier - 1 * 3 * 10 = \$30
amount on advertising earlier - \$ (12 * 30) - \$360

Current Scenario -
No. of Issues per year - 6
postage rates per issue - \$8
no. of advertising space purchased by advertisers per issue - 10 * 2 = 20 (as number of articles will still be the same, so it will double, as no. of issues reduced by half)
amount on advertising per issue now - \$30 (As per this option, its same as earlier)
But calculation as per current scenario - 1*8*20 = \$160 ,
amount on advertising now - \$(6 * 160) - \$960 (the amount which the advertisers needs to pay now, but they are paying the same amount as earlier.)
Thus this will result in a loss for magazine's profits. Thus, plan is bad and this is the correct option.

(E) Production costs for the magazine are expected to remain stable.
Profit = (Sales Revenue - Production Costs), just knowing the production costs we cannot comment on the profits. We need to know about the sales revenue as well to comment on the profit. We don't have enough information on the same. Incorrect.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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04 Sep 2017, 07:11
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?

(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. -This will strengthen the argument. Since if the production is cut to half, then the costs will go down by half. Consecutively, if the mailing cost increases by one third then still it will be cheaper for the company to publish the magazine than before.
(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 quantity won't reduce. This is opposite of the premise.
(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased. -This will strengthen the argument. Since the magazine could make even more profit.
(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. -Correct. Since the advertising revenue is generated per issue, the revenue will go down. This is because the number of issues will be decreasing.
(E) Production costs for the magazine are expected to remain stable -This will strengthen the argument.
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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19 May 2018, 00:08
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
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Re: Because postage rates are rising, Home Decorator magazine plans to max  [#permalink]

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06 Dec 2018, 01:12
GMATNinja wrote:
Masterscorp wrote:
Superg8 wrote:
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

The main concern here is rising shipping costs (postage rates). All else equal, if shipping costs have increased, then overall profits must have decreased. In other words, if revenues, production costs, and other costs have remained constant but SHIPPING costs have increased, then profits have decreased.

How can we can we decrease our shipping costs? By cutting the number of issues per year in half. That will immediately cut our shipping costs in half, even if, as stated in (E), production costs remain stable. So even if (E) is true, if we cut our shipping costs in half and revenue remains constant, we can boost our profits. Thus, (E) can be eliminated.

(D), on the other hand, tells us that if we cut the number of issues in half, then the our revenue from advertising will also be cut in half. Sure, we don't know what percentage of overall revenue comes from advertising, but this is strong evidence that cutting the number of issues in half will hurt our bottom line. (D) is a better answer.

I hope that helps!

I don't understand choice (A) what does it says. Isn't it says the opposite of what we want?

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

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07 Jan 2019, 20:11
Another typical GMAT question which stresses that each word is important. I didn't notice the 'per issue' and chose A. Good one!
Re: Because postage rates are rising, Home Decorator magazine plans to max   [#permalink] 07 Jan 2019, 20:11

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