Companies considering new cost-cutting manufacturing : GMAT Critical Reasoning (CR)
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# Companies considering new cost-cutting manufacturing

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Manager
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Companies considering new cost-cutting manufacturing [#permalink]

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05 Sep 2012, 05:26
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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.
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Re: Companies considering new cost-cutting [#permalink]

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06 Sep 2012, 07:39
IMO D.

Given : important factors in decision making : costs, selling prices, and share of market remaining constant

Option D suggests that competitors may reduce their prices and thus taking away market shares. Thus, if D stands true, these companies will not be able to keep market shares constant with constant selling price
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06 Sep 2012, 11:33
I had selected C, though, not sure of it.

Unable to understand, how u (piyatiwari) have selected D.

can u explain more?
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06 Sep 2012, 13:00
I would go with "D" as well.. it looks like the only one that makes sense..
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Re: Companies considering new cost-cutting [#permalink]

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06 Sep 2012, 16:57
IMO E.

The cost per year could vary. It depends on the lenght of the period that we will choose.
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Re: Companies considering new cost-cutting [#permalink]

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06 Sep 2012, 17:35
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Re: Companies considering new cost-cutting manufacturing [#permalink]

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01 Jan 2013, 21:05
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Expert's post
jitgoel 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.

Responding to a pm:

The wording of the question is atrocious. The intent is not clear. The question needs to clearly specify that in their analysis, the companies assume that the market share will remain constant. Otherwise we are left wondering whether they assume that their market share will remain constant or they analyze 'whether their market share will remain constant or change'.
The intent of the question is probably that the companies assume that the market share will not change. Hence, if in reality, the market share does change, all their calculations will go for a toss. This is a big disadvantage.
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Re: Companies considering new cost-cutting manufacturing [#permalink]

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01 Jan 2013, 22:28
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jitgoel 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.

The logic behind the company's evaluation plan has the flaw that the company's decision can be considered in isolation from the decisions of other companies. This need not be the case as the market share of a company doesn't solely depend on its strategy. D attacks exactly that logic and says the company will lose its market share even due to a competitor adopting an opposite strategy. That is even if the company comes to a decision that maintaining the same cost and the selling price is better financially based on the comparison of its costs and selling price and the market share in the two scenarios, a competitor who does invest in the processes for whatever reason, might upset that plan.
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Re: Companies considering new cost-cutting manufacturing   [#permalink] 01 Jan 2013, 22:28
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