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# Clearbell Telephone provides slow-dialing (SD) service to customers fo

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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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I will vote for A. If revenue were less for FD than the cost of providing SD to customers, providing FD would make sense and will not reduce profits.

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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

Accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate, although FD tech costs Clearbell substantially less per average call to provide than does SD
we have two things-
1. Loss in revenue because of charging the current low-fee rate across all customers post FD tech for entire customer base
2. Cost savings because of efficiency of FD tech

A. The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee. - Correct, it states that extra revenue collected from FD customers(who pay the higher fee) is higher than additional cost of providing SD to customers who pay the low fee

B. The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year. - Irrelevant, it does not explain our situation

C. Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service. - irrelevant, although customers regard FD is better, most of them are not willing pay higher

D. The company's competitors generally provide business customers with FD service at low-fee rates. - incorrect, it does not explain the paradox. If Clearbell telephone provides FD at low-fee rates, then some of the customers of the competitors might move to Clearbell

E. Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.
- Irrelevant

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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

A. The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.

B. The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year.

C. Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.

D. The company's competitors generally provide business customers with FD service at low-fee rates.

E. Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.

CR20661.01

Official Explanation

Argument Construction

The argument suggests that fast-dialing (FD) service costs Clearbell Telephone less to deliver per call than does slow-dialing (SD) service, which Clearbell delivers at a lower fee. There are no significant extra costs such as installation to switch to FD if a customer is already a user of SD. Nevertheless, accountants expect Clearbell's profits to decrease if the company were to provide the high-priced FD service at the lower SD rate. Our goal here will be to find a reason for this apparent contradiction.

A. Correct. This answer provides a plausible reason for the contradiction. Ultimately, we do not know the amount of extra fee that FD customers pay relative to SD customers. If the higher FD fees make up a substantial portion of the company's revenues, then it is very possible that the proposed change would reduce revenues significantly enough to lower profits. Remember, the SD service actually costs more for Clearbell Telephone. Therefore, the balance to find is whether the current higher FD fees generate more revenue than the money saved by eliminating SD service and instead providing FD services at the low fee.

B. This statement provides information about how Clearbell's current prices were set. However, it provides no information as to how the proposed changes might affect profits.

C. This statement does not explain the results of the accountants' calculations. First, customers' preference is irrelevant to the accountants' results. Second, if we were to assume that 10 percent is a small figure, it is still possible that FD fees are great enough to offset the extra costs Clearbell incurs by providing SD service. Third, since the cost to Clearbell is less per call using FD service, Clearbell's profits may in fact increase if all customers were to be given FD service.

D. This statement is outside the scope of the argument. First, practices of Clearbell's competitors have no bearing on the accountants' calculations. Second, we have no way to determine what the change in Clearbell's profits and its competitive position might be if Clearbell were to provide FD service at the low-fee rate to its business customers. Third, given the facts provided in the argument, it is entirely possible that Clearbell already gives preferential rates for FD service to its business customers.

E. This information does not help explain the results of the accountants' calculations. Simply because the changes in profit and the introduction of FD service happened at roughly the same time, we cannot assume that one caused the other. That is, it is possible that these fluctuations in profit are due to normal, perhaps seasonal, fluctuations in profits. Therefore, these fluctuations would not necessarily negatively impact Clearbell's overall level of profitability.

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Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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I understand the question and explanation; but I hope I am not the only one who feels there is a gap in the information provided in the passage.

There is no proper sentence that mentions that Clearbell will change the fee from a "somewhat higher fee (compared to an SD low fee)" to the "current low-fee rate". The argument shifts from FD is cheaper to install and provides more revenue, and assuming installation charges are insignificant to accountants predicting unprofitability at a price change.
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
gmatt1476
Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

A. The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.

B. The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year.

C. Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.

D. The company's competitors generally provide business customers with FD service at low-fee rates.

E. Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.

CR20661.01

Can you please explain this question ?
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
sayan640
gmatt1476
Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

A. The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.

B. The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year.

C. Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.

D. The company's competitors generally provide business customers with FD service at low-fee rates.

E. Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.

CR20661.01

Can you please explain this question ?
Again, is there anything in particular that is giving you trouble here? The more specific you can make your question, the easier it is for us to help!
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
Can any expert please deconstruct the argument, still unable to figure out how A is the answer.
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
Can any expert please deconstruct the argument, still unable to figure out how A is the answer.
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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Mathematical model of argument

Profit = Revenue( FD+SD) - Cost ( FD+SD)

Now cost of FD is very less, so we can re-write the equation as
Profit = Revenue( FD+SD) - Cost (SD)

Now, accountant says that providing FD at low rates will impact profit negatively.

Means somewhere your revenue from FD has greater proportion in total revenue. And provision of FD at low rate will wipe out your major revenue portion.
This thinking goes along with option A.
So option A must be winning choice.
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Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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I struggled with this question for quite a bit but tried to work out some semblance of a quick math that fits Option A, could be wrong on this but here goes.

Note that we're not asked to find something that MUST BE TRUE - we're simply trying to find a scenario that COULD BE TRUE and that would increase our belief in the conclusion that indeed profits will fall if only FD was extended to all customers.

Quick example to fit option A:

-We assume FD makes up substantial portion of the revenue
-For simplicity, we have only a total of 2 customers: 1 customer who uses FD, 1 customer who uses SD.

Current scenario:

FD service (1 customer)
-Total Rev = \$10
-Total Cost = ~\$0 (so efficient)
-Price: \$10/customer

SD (1 customer)
-Total Rev = \$1
-Total Cost = \$2 (deemed so expensive that we incur -\$1 profit to provide SD service to current customers at low-fee rates, that it's neg)
-Price: \$1/customer

Total revenue = \$11
Total cost = \$2 (from SD service)
Total profit = \$9

New scenario:

We sell only FD to all 2 customers at SD's rate of \$1/customer, while eliminating the cost of providing SD (\$2).

Total revenue: \$1/customer * 2 customers = \$2
Total cost: ~\$0 (so efficient is FD)
Total profit: \$2 ---> this is \$7 lesser than \$9 in the current scenario

Is the extra revenue from selling FD greater than the extra cost in providing the SD service at low-fee rates? Yes --> if we switched to the new scenario, we would lose \$9 of revenue, and gain \$2 of savings from not providing SD. That's a net loss of \$7 on profitability.

This is just ONE possible scenario - we only need to prove what could be true, and would most help explain the estimation from the accountants.

Option A in my opinion also gives a bit more certainty than the other options; at the end of the day we want to know what's the net impact on total revenue vs total cost (simplifying profitability to [\$/Cust - Cost/Cust] * No. of Customers)

Other options only give information on one part of the equation i.e. rate, % changes on an unknown base number, or info irrelevant to the argument.

Happy to hear feedback and suggestions on explaining the solution.
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
GMATNinja VeritasKarishma can you please explain a good way to eliminate option C?
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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GMATNinja VeritasKarishma can you please explain a good way to eliminate option C?
The accountants' argument in the passage is that by switching everyone to the FD service, Clearbell's profits would drop. We know from the passage that providing the FD service reduces costs.

For Clearbell's profits to drop, the reduction in revenue from not charging the higher fee must be greater than the cost savings in providing FD service to all customers.

So the correct answer would show that the reduction in Clearbell's revenue would be greater than their cost savings under the new system. Let's check whether (C) accomplishes this.

(C) tells us:
Quote:
C. Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.
(C) tells us that lots of Clearbell's customers think FD is a better product than SD but relatively few of them will pay the extra costs.

This doesn't tell us anything about Clearbell's profits under the current system. We don't know the actual cost or revenue breakdown for the FD and SD systems. Also, the customers' feelings about the FD and SD systems don't matter, as they'll be switched whether they like it or not. So, this doesn't tell us anything about Clearbell's profits after switching everyone to FD.

(C) does not help us explain the accountants' argument, so we can rule out (C).

Let's take a look at (A):
Quote:
A. The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.
This explains the accountants' argument. Clearbell may make cost savings by providing the FD service to everyone but this saving will be lower than the reduction in revenue from not charging the higher fee for the FD service. This is exactly what we were looking for in an answer choice that would explain the accountants' argument.

Since (A) helps explain Clearbell's drop in profits, (A) is the answer to this question.

I hope that helps!
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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gmatt1476
Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?
CR20661.01
The image attached with this post shows the two scenarios. The top table shows the actual scenario and the bottom table shows the projections of the accountants

A. The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee
This one goes in line with the bottom table from the attached image, which shows that when the price of FD is matched with SD, the profits reduce substantially

1. Top table from the image shows \$10 in profits when customers pay the higher fee for FD
2. The bottom table from the image shows \$4 in profits when FD is offered at the same price as SD to customers

B. The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year
If the cost remained same, then as per this option the profits should have increased. But accountants' calculations tell us that profits will drop. Hence, we can eliminate this option in absence of information about cost

C. Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service
This options tells us that <10% of the customers use the service and hence can weaken or neutralize the accountants' calculations because a change made to a smaller base of customers might not have a significant impact on the profits

D. The company's competitors generally provide business customers with FD service at low-fee rates
The question asks us to justify the calculations about the Clearbell Telephone company and not the competitors, hence this option can be eliminated

E. Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months
This does not justify the accountants' calculation. Profits might have decreased because usage might have dropped or a multitude of other reasons

Ans. A
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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khan0210
I understand the question and explanation; but I hope I am not the only one who feels there is a gap in the information provided in the passage.

There is no proper sentence that mentions that Clearbell will change the fee from a "somewhat higher fee (compared to an SD low fee)" to the "current low-fee rate". The argument shifts from FD is cheaper to install and provides more revenue, and assuming installation charges are insignificant to accountants predicting unprofitability at a price change.

khan0210

Here Extra Revenue vs EXTRA costs is he main crux to understand option A.

Extra Revenue: FD- SD
Extra cost: SD's cost - FD's cost

so the overall Extra revenue is greater than overall Extra Cost. Therefore reduction in overall extra revenue will also be greater compared with overall extra cost. Hence, profit would decrease.
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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
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gmatt1476
Clearbell Telephone provides slow-dialing (SD) service to customers for a low fee, and fast-dialing (FD) service to other customers who pay a somewhat higher fee. FD technology, however, is so efficient that it costs Clearbell substantially less per average call to provide than does SD. Nonetheless, accountants have calculated that Clearbell's profits would drop if it provided FD to all its customers at the current low-fee rate.

Assume that installation costs for FD are insignificant if the customer already has SD service. Which of the following, if true about Clearbell, best explains the results of the accountants' calculation?

A. The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.

B. The low fee was increased by 6 percent last year, whereas the higher fee was not increased last year.

C. Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.

D. The company's competitors generally provide business customers with FD service at low-fee rates.

E. Profits rose slightly each month for the first three months after FD was first offered to customers, then fell slightly each month for the succeeding three months.

CR20661.01

NOTE: I should note that the first two times I read the line "....if it provided FD to all its customers at the current low-fee rate," I assumed that the rate they were referring to was the present FD rate.

However, the intent of the question is to say "....if it provided FD to all its customers at the present SD rate."

Once this is clear, the question isn't so bad.

Here's an analogous situation:
Joe buys his apples wholesale. He pays \$1 for each green apple, and \$2 for each red apple.
Joe sells green apples for \$1,000,000 each, and red apples for \$10 each.
At the moment, he sells 10 green apples and 10 red apples per day.

As you can see, the scenario is in line with the original question.
On the EXPENSE side, it costs more to get red apples than it does for green apples.
On the REVENUE side, people pay more for green apples than they do for red apples.

Accountants' conclusion: If we start selling only green apples and sell them for \$10 each (the low price charged for red apples), then our profits will drop.
This is definitely true.

At the moment, the daily REVENUE = (10)(\$1,000,000) + (10)(\$10) = \$10,000,100
At the moment, the daily EXPENSES = (10)(\$1) + (10)(\$2) = \$30
So, at the moment, daily PROFIT = \$10,000,100 - \$30 = \$10,000,070

Now let's examine what happens if we start selling only green apples, and we sell them for \$10 each (the low price charged for red apples)
REVENUE = (20)(\$10) = \$200
EXPENSES = (20)(\$1) = \$20
PROFIT = \$200 - \$20 = \$180
In this scenario, the expenses are a little bit lower, BUT the revenue is wayyyyyyyyyyy lower, which means the profit is lower.

(A) The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.
In other words, the extra revenue collected from selling green apples is greater than the extra expense of buying red apples.

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Re: Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
hello,
a little bit of doubt here with option A

the option A only stands if people still continue to use SD calls even after the company lowers the rate for FD calls.
which makes no sense if FD calls are at same low rate as SD then why would people use SD calls (As it is inferior technology with no benefits)? The intention of lowering rate would be to make user switch to FD from SD, which would than eliminate the cost of SD and profit would actually increase.

PS My sole reason to choose answer A was that none of the others made sense at all, this was doubtful too, but I had no choice left.
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Clearbell Telephone provides slow-dialing (SD) service to customers fo [#permalink]
Dear GMATNinja
My approach is:

SD FD
Cost C1 C2
Revenue R1 R2
Profit1 (R1-C1)+(R2-C2)

If all SD changed to FD with cost is at FD's rate but sale (revenue) is at SD's rate, then profit2 is 2*(R1-C2)

From accountant's calculation: profit2 < profit 1 --> 2*(R1-C2) < (R1-C1)+(R2-C2)

OR: C1-C2 < R2 - R1
This inequality match choice A:

GMATNinja
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GMATNinja VeritasKarishma can you please explain a good way to eliminate option C?
The accountants' argument in the passage is that by switching everyone to the FD service, Clearbell's profits would drop. We know from the passage that providing the FD service reduces costs.

For Clearbell's profits to drop, the reduction in revenue from not charging the higher fee must be greater than the cost savings in providing FD service to all customers.

So the correct answer would show that the reduction in Clearbell's revenue would be greater than their cost savings under the new system. Let's check whether (C) accomplishes this.

(C) tells us:
Quote:
C. Although 96 percent of customers regard FD service as reliable and more convenient than SD, fewer than 10 percent of them choose to pay the higher fee for FD service.
(C) tells us that lots of Clearbell's customers think FD is a better product than SD but relatively few of them will pay the extra costs.

This doesn't tell us anything about Clearbell's profits under the current system. We don't know the actual cost or revenue breakdown for the FD and SD systems. Also, the customers' feelings about the FD and SD systems don't matter, as they'll be switched whether they like it or not. So, this doesn't tell us anything about Clearbell's profits after switching everyone to FD.

(C) does not help us explain the accountants' argument, so we can rule out (C).

Let's take a look at (A):
Quote:
A. The extra revenue collected from customers who pay the high fee is higher than the extra cost of providing SD to customers who pay the low fee.
This explains the accountants' argument. Clearbell may make cost savings by providing the FD service to everyone but this saving will be lower than the reduction in revenue from not charging the higher fee for the FD service. This is exactly what we were looking for in an answer choice that would explain the accountants' argument.

Since (A) helps explain Clearbell's drop in profits, (A) is the answer to this question.

I hope that helps!
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