Companies considering new cost-cutting manufacturing processes often

Well when it comes to costs being uncertain everyone is affected but if your competitors use an advantage that would take market share (which you assumed to be constant) away from companies like yours it could seriously affect your business.

At least that's my take on it.

I wrote a huge explaination but then my system crashed..jst before i was going to post it!!!



My viewpoint: ( let me know if i am wrong somewhere)

argument: The companies which consider new process take into account the comparison between the initial investment and other factors without making the investment.
question : to find something which would prove that even following this process would be a loss.

Hence, we are not suppose to compare the initial investment vs alternative of not making the investment with costs, selling prices,etc but compare the companies that follow this process vs companies that do not..

(A) The costs of materials required by the new process might not be known with certainty. - It looks like a good option. But then, this proves that follwoing this process might be wrong or right. If the cost of materials are low, then the investment would be a wrong decison and if the cost prices are more, then the investment might be good. No where we would know what happens to the other companies. Hence, although is looks good, its the incorrect option.

(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment. - Again the same thing. we are comapring the process, not the companies. Hence, incorrect

(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. - not even considered as an option

(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. - now look at this option. This actually confirms that following this process would be a risk to companies becuase it requires some investment. The companies which do not even follow this process are free of such process investment and hence, they can reduce the costs of their products and gain monoply in the market. Hence, it would be disadvantageous for the company.

(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result. - again, not relevant
I hope my explaination helped..

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.
Answer (D)

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.

It has already been mentioned in the argument that "selling prices remaining constant". Hence in "D" "reducing selling prices" is going against the fact. In CRs we cannot go against the given facts. We can only question the reasoning behind the conclusion. So "D" is not a feasible option. While in "B" if the interest rates go down then it makes sense to invest but if the interest rates do not decline then it’s not worth investing.

For me D made perfect sense in the first read itself. Why all this confusion? What am i missing?? Below is my reason to choose D:

Premise: Companies project and compare results (thereby decide upon investing), keeping 3 factors constant- costs, selling prices, and share of market.
Understanding the premise: At the time when companies investigate and make the decision to invest (or not to invest), they assume that costs, selling prices, and market share will remain the same at the time of investment (i.e. in future)
(this is what i understand, please correct me if you feel i'm dreaming)

Question stem: Which of the following proves that the above method is flawed?
Understanding the question stem: Below you are going to see some real-time situations that may occur in future (when the time for actual investment comes). One of which will prove that the way companies predict (or decide) upon investing is not sound.

Pre thinking: Off course, making assumptions based on future is always vulnerable. How can companies just pre-assume that 3 big factors will not chnage! Any option that provides even a hint that any of the 3 factors assumed to not change is going to vary, the plan will fall apart.
.. and thats exactly what D does.

Why is D correct:

(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.
Say, company X keeps its market shares const. while they plan- to invest or not to invest. Meanwhile, company Y (already doen with their 'planning') invests in new process, reduces the selling price of its own products and take away the market share from company X. What happens with X? Their plan was based on const. market share and it will fail miserably as the base itself is shattered.

btw AryamaDuttaSaikia, according to me, 'Selling price remains const.' is not a premise but part of the very plan that needs to be weakened in the question. We can (and must) attack this. And anywys, option D talks about selling price of Competitors, they can always alter that even if our company X doesn't. Please correct me!

Why are others wrong:

(A) The costs of materials required by the new process might not be known with certainty.
This doesnt make sense because to keep something const. you should first know its current value.

(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
Out of scope! The question is not whether the companies should invest now or invest later but whether their plan is sound or not. In fact, the outcome of their plan will be either to invest or not to invest, there is no point of 'when to invest' here. If i want to do something now, i'll either do it or not do it. Dont tell me to wait for 'several years', thats irrelevant. And btw, who told they are borrowing money for this investment?? (last thing we should do is to make assumptions in answer choices!)

(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.
Irrelevant! We are only concerned with the 'method of evaluating'. What happens after the investment- profit or loss is none of our business.

(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.
Irrelevant! Firstly, as discussed in C, we dont care about the result. And period of year wouldnt matter as the planning would be done based on the the current situation.

This was my thought process. I was surprised to see so much of confusion about the answer choices. I may be missing somehting basic. Please correct me if im wrong.

Not an official question, therefore not worth fretting over. That being said, A and D are the only answers that can work, with D being a little stronger. Here's why:

First, the question asks us for a disadvantage for using the method for evaluating the financial benefit of new manufacturing processes. We are going to have to be very careful to identify the characteristics of the method, because the question is probably going to hinge on that.

The method given is to "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." A few things are worth noting. 1) this is about comparing the results of making the investment to the results of not making the investment, 2) the method appears to allow consideration of all factors that it does not exclude (this is important), and 3) it excludes costs, selling prices, and share of market from the consideration.

B.) Talks about interest rates. However, interest rates are not on the list of excluded topics. So, while interest rates might have a huge effect on whether the investment is a good idea or not, the computed expected results as part of the analysis should include the effect of interest rates. Thus, the method is not flawed and this is not a disadvantage. INCORRECT

C.) Talks about how long it will take for the company to see a return on its investment. Just as in B, this is allowed to be part of the calculation of expected results because it is not excluded. Therefore, that this might happen is not a disadvantage for the method because those employing the method should consider it. INCORRECT

E.) Talks about choosing a year for projecting the investment. Again, just as in B and C, this is allowed to be part of the calculation because it is not excluded. Thus, it is not a disadvantage because it should be part of the analysis. INCORRECT

So, we are left with A and D

A.) Costs are excluded from the analysis under the method, so any issues with cost that could affect the decision would create an inaccurate analysis and therefore pose a disadvantage for the method. POSSIBLE

D.) Just as in A, market share is excluded from the analysis, so any issues with market share that could affect the decision would create an inaccurate analysis and therefore pose a disadvantage for the method. POSSIBLE

So, why D over A? Simply because A only says that we cannot do it with certainty, and this leaves a lot of possibilities open and therefore doesn't create as big of a disadvantage as in D. Sure, it is not certain, but does it actually create a problem for the analysis? Maybe it does, but maybe instead the costs will not fluctuate very much and will, for the most part, remain somewhat constant, thus allowing the analysis to be accurate in that respect. That would not pose a problem for the method's keeping costs constant. Since A is not strong enough and only possibly creates a disadvantage, it is probably not as strong as D.

D on the other hand, is much stronger and poses much more of a problem for analysis under the method. We are no longer saying that the excluded variable is uncertain as in A; instead we are saying in D that the market share will change depending on whether or not the investment in the new process is made. This should have a significant effect and thus invalidate any analysis that does not take it into consideration, such as analysis under the method in question. This creates a big disadvantage for the method.

Correct Answer: D

(arhumsid touched on this, but I wanted to make sure that everyone has the full reason why, including why A is relevant but not strong enough)

Hi mmagyar, nice insight on A! However, i have different thoughts.
I agree that A is the closest after D, as it is the only one speaking about one of the given 3 factors (cost, selling price and market share) other than D. However, A is not wrong because it says that the cost is not known with certainty but for other reasons:
1) First of all, the argument only says 'cost' and option A states 'costs of materials required by the new process' (please note, its not the 'cost of new process', but cost of the material required for that. In a way it goes even further to create suspicion). As far as the original argument is concerned, it is not evident that the costs it refers to are the costs of the materials reqd by the new process. Though it implies that as with other factors (SP and market share), this cost must refer to the overall cost to the company. So, in short, we wold need to make multiple assumptions to get A convince us.

2) Assuming that the two costs (from option A and from the argument) are same, not knowing the cost with certainty isnt the problem. The problem is whatever they are, the companies are treating them as constant. The method of evaluation would still be flawed even if the costs were known because the issue is that they are assumed to not change. D exploits this very issue with the method.

For me, A is a classic wrong answer

Does that make sense? would like to hear more about this...

Please explain ELABORATELY AND DISTINGUISH CLEARLY as how to eliminate the choices

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