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# Companies considering new cost-cutting manufacturing

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Intern
Joined: 13 Feb 2011
Posts: 5
Companies considering new cost-cutting manufacturing [#permalink]

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16 Mar 2011, 06:08
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Difficulty:

45% (medium)

Question Stats:

57% (02:16) correct 43% (01:22) wrong based on 21 sessions

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Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.

Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?

(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

WHAT MAKES D A BETTER OPTION THAN A?

OPEN DISCUSSION OF THIS QUESTION IS HERE: https://gmatclub.com/forum/companies-co ... 96725.html
[Reveal] Spoiler: OA
Intern
Joined: 20 Jul 2010
Posts: 7
Concentration: Strategy, General Management
Schools: Ross School of Business - Class of 2014
Re: Companies considering new cost-cutting manufacturing [#permalink]

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16 Mar 2011, 10:09
rochak wrote:
Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.

Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?

(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

WHAT MAKES D A BETTER OPTION THAN A?

Here's is my logic -
Option A - If the costs of materials required by the new process is not known then the company and its competitors both have the same disadvantage....so if the new cost is less then everybody will benefit but if the cost is more then everybody will be at loss. Nobody has the upper hand...
Option D - Clearly expresses the benefits of implementing the new process. The company is at risk of loosing it's business if it does not implement the process.

This is what I think makes option D better than A. But people may have different views..
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Affiliations: University of Chicago Booth School of Business
Joined: 03 Feb 2011
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Re: Companies considering new cost-cutting manufacturing [#permalink]

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16 Mar 2011, 21:25
D is obvious. If company doesn't reduce the price the competitors will

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Joined: 05 Jan 2011
Posts: 177
Re: Companies considering new cost-cutting manufacturing [#permalink]

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23 Mar 2011, 03:05
+1 FOR D
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Re: Companies considering new cost-cutting manufacturing [#permalink]

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04 May 2011, 22:04
Except D,B C and E can be corrected by the financial projection model.
D is a factor not taken care of. Hence OA.
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Manager
Joined: 16 Mar 2011
Posts: 188
Re: Companies considering new cost-cutting manufacturing [#permalink]

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06 May 2011, 13:29
sumeeet4u wrote:
rochak wrote:
Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.

Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?

(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

WHAT MAKES D A BETTER OPTION THAN A?

Here's is my logic -
Option A - If the costs of materials required by the new process is not known then the company and its competitors both have the same disadvantage....so if the new cost is less then everybody will benefit but if the cost is more then everybody will be at loss. Nobody has the upper hand...
Option D - Clearly expresses the benefits of implementing the new process. The company is at risk of loosing it's business if it does not implement the process.

This is what I think makes option D better than A. But people may have different views..

D is the answer but not becuase of the above explanation.
the stem explains the method as "compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant " and the question askes about what "constitutes the most serious disadvantage for companies of using the method". the only answer that indicate an issue which this method does not take into account is D. it introduce a factor which this method does not consider "competition" [in logical arguments a new factor not considered indicates a point that could weaken the argument as a whole]. the rest of the answers are all explainable some how with the method: in the manner you calculate cost of material, interest and etc.[you can always calculate a variance and SD and possiblity of % error in any type of calculation] so the issue is never accuraccy od data, it is the new factor and that is why D is correct.

CR questions require a pure logical explanation and they don't need any outside knowledge to solve them [always remember this fact]
Intern
Joined: 12 Feb 2010
Posts: 17
Re: Companies considering new cost-cutting manufacturing [#permalink]

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18 May 2011, 06:26
i still didnt get. The last part of the agument says
"making the investment with costs, selling prices, and share of market remaining constant."

it says keeping selling price constant then how can a answer say selling price increase or decrese.
Manager
Joined: 16 Mar 2011
Posts: 177
Re: Companies considering new cost-cutting manufacturing [#permalink]

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24 May 2011, 08:39
raisethebar wrote:
i still didnt get. The last part of the agument says
"making the investment with costs, selling prices, and share of market remaining constant."

it says keeping selling price constant then how can a answer say selling price increase or decrese.

Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.

Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?

(A) The costs of materials required by the new process might not be known with certainty.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.

WHAT MAKES D A BETTER OPTION THAN A?
-Costs might not be known with certainty: the whole market faces this problem.. Also, when calculating, there are sensitivity analysis applied to in order to mitigate any uncertainty.. This could therefore never be the most serious disadvantage.. If you think about it, costs are never really certain (including costs that might occur in the future) untill you're about to 'make them'..
-If you want to value your investment by looking at the costs involved in the process, companies that DO invest in new processes will reduce their selling price.. So their cost price will never reflect the true cost price in the first place because they're settling with smaller profits in order to give their competitors a hard time by taking away market position.. Why do they do that? Because eventually the new investment will give them more firm value so it's anticipating upon future profits.. Companies that do NOT invest, will probably not be able to lower their selling prices because they have no new investments and thus no upcoming profits to rely upon..

Hope this helped.. Good luck!
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Location: United States
Concentration: Economics, Finance
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Re: Companies considering new cost-cutting manufacturing [#permalink]

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30 May 2011, 02:37
Clearly D! Not A because costs for current manufacturing process might also fluctuate! So no advantage/disadvantage!
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Joined: 02 Sep 2009
Posts: 39659
Re: Companies considering new cost-cutting manufacturing [#permalink]

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15 Mar 2017, 09:38
OPEN DISCUSSION OF THIS QUESTION IS HERE: https://gmatclub.com/forum/companies-co ... 96725.html
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Re: Companies considering new cost-cutting manufacturing   [#permalink] 15 Mar 2017, 09:38
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