CEO: Over the past several years, we have more than doubled our revenu

Question

CEO: Over the past several years, we have more than doubled our revenues but profits have steadily declined because an increasing number of customers have failed to pay their balances. In order to compensate for these higher default rates, we will increase the interest charged on outstanding balances from an annual percentage rate (APR) of 9.5% to an APR of 12%. This increase will be sufficient to compensate for the current rate of defaults and allow us to increase our profits.

Which of the following statements, if true, would most seriously undermine a plan to increase interest rates in order to spur profitable growth?

(A) Many other companies have experienced a similar trend in their default rates.

(B) The company's operating expenses are above the industry average and can be substantially reduced, thus increasing margins.

(C) The increase in default rates was due to a rise in unemployment, but unemployment rates are expected to drop in the coming months.

(D) The proposed increase in the APR will, alone, more than double the company's profit margins.

(E) An increase in the APR charged on credit card balances often results in higher rates of default.

VeritasPrepBrandon · Accepted Answer

This is a "weaken the plan" type weaken question. In plan-style critical reasoning questions, view the steps of the plan as the premises and the ultimate objective of the plan as the conclusion. Here the step is to increase the interest rate charged on outstanding balances, and the goal is to increase profits. Because we are weakening, we are looking to insert another premise that would attack the gap between this premise and conclusion.

Answer choice A is out of scope and irrelevant. We are focused only on this one company, not others.

Answer choice B is a common trap answer to these style questions. The presence of a better plan does not weaken the existing plan; it is out of scope.

Answer choice C is also out of scope. Discussing how the problem may resolve itself does nothing to attack the gap between premise and conclusion in this plan.

Answer choice D is strengthening the argument, and is thus a strengthen trap answer to a weaken question.

Answer choice E nails it and is thus correct. If the increased APR will worsen the default situation (which is what the CEO is trying to account for by increasing the APR), then it is very possible that the goal of increasing profits will not be accomplished. The company may actually end up decreasing profits even further, or remaining steady.

I hope this helps!

apoorv601 · Answer

Great!! Thanks for the explanation

rezaulnsu · Answer

Can you pl. clarify why option A is out of scope? You said that since we are concentrating on one company at hand, thinking of others is just lrrelevant. Whatif it is our systemic or national problem? 
Ok, it is about many other companies, not all. So, we can't say this as systemic problem. I am trying to fit option A through replacing 'many others' by 'all'. What if, it were the same problem of almost every company? in this case, can we think option A a candidate?
In addition, I have another explanation regarding option C. The option C tries to tempt us to present a reason why the default rate is higher now and how it will be reduced overtime after unemployment improves. Whatif unemployment solves, but ppl don't change their habit? So, we need another assumption that reduction of unemployment rate will reduce default rate. Any answer choice requiring further assumption or condition to make the argument works is wrong! If Increase of A causes increase of B, who guarantees that reduction of A also causes reduction of B!
Pl. justify what I have said so far.

santro789 · Answer

Why not B the answer? Regarding option A - Its is out of scope since we are not bothered about other industries. So in the same way - Option E - talks about APR rate in credit card industry or trend in credit card industry, so why are we bothered about credit card industry? It could be the case that APR rate in credit card industry is already high and increase in APR could something which people cant afford payback at any cost - I feel we cant compare.

Whats the flaw in my thinking? can someone explain this please

Whats the flaw in my thinking? can someone explain this please

TaN1213 · Answer

In B ,  an alternate solution  is given to attain profit. We are asked to undermine that t he solution of increasing APR  will increase the profit. B is hitting the wrong target.
E is correct because no other option is even close to the aim. Even though E introduces a new information by mentioning credit card division, it still does a neat job by explaining why increasing APR will fail to increase the profit.

kornn · Answer

Dear AjiteshArun RonPurewal , Is the highlighted portion below a claim or evidence or fact ? This increase will be sufficient to compensate for the current rate of defaults and allow us to increase our profits I still cannot differentiate between a claim or evidence. According to mikemcgarry (https://gmatclub.com/forum/claim-vs-evi ... 66410.html), a prediction such as the one above is a claim. But I feel that it could also be considered a given fact! Thank you for your help Sir!

DavidTutorexamPAL · Answer

This is a claim. In fact it is THE claim - the main thing the passage is arguing. 
It is a claim, rather than a fact or evidence, because it is a conclusion drawn from the previous bits of evidence provided.

kornn · Answer

Dear  DavidTutorexamPAL   AjiteshArun   VeritasKarishma ,

I think that  the conclusion is from the question stem , which states that a plan to increase interest rates can spur profitable growth. In my opinion, this is different from   This increase will be sufficient to compensate for the current rate of defaults  .

The reason why I am confused is because MGMAT's solution (P.167 in ed.6) says that:
 "They're  claiming  that 12% will be enough to compensate for the current rate of people who don't pay..." 
 "The  evidence  shows only that the higher interest rate will be sufficient for today's default rate; that could change over time"

The 2 sentences above from the solution seem to be a paradox. I am not sure which to believe.

Thank you in advance !

DavidTutorexamPAL · Answer

First off, The conclusion will never be hiding in the question - it will ALWAYS be in the paragraph itself. The question stem is merely rephrasing the paragraph's conclusion.

Second of all, I agree the wording there is confusing. But distinguish between the evidence itself - what it  is  - and what someone claims the evidence shows : what it  shows  could certainly be the conclusion

Saharsh95 · Answer

Based on the reason as stated for eliminating option B, can we "generalize" that in "weaken the plan" questions, we can ignore the answer choices providing alternate solutions (which are expected/stated better than proposed plan)?

Posted from my mobile device

Posted from my mobile device

KarishmaB · Answer

The "conclusion" is the conclusion of the argument. Sometimes, the conclusion may not be explicitly stated in the argument though you can easily figure out what it is. The question stem may word or reword the conclusion to make things easier for you. That is what it does here.

CEO: We have more than doubled our revenues but profits have steadily declined. 
More customers have failed to pay their balances. 
To compensate for these higher default rates, increase the interest rate from 9.5% to 12%. 
This increase will be sufficient to compensate for the current rate of defaults.

Conclusion: This increase will allow us to increase our profits.

Which of the following statements, if true, would most seriously undermine a plan to increase interest rates in order to spur profitable growth?

The conclusion in the question stem relates to "increasing interest rates for better profit". 
The obvious issue with this plan could be an increase in default rates. Then the increased interest rate may not be able to make up for the shortfall.

(E) An increase in the APR charged on credit card balances often results in higher rates of default.

Perfectly points out the problem with the plan.

Answer (E)

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