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# Companies considering new cost-cutting manufacturing

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Intern
Joined: 05 Jul 2006
Posts: 9

Kudos [?]: 1 [0], given: 0

Companies considering new cost-cutting manufacturing [#permalink]

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09 Apr 2008, 11:39
17. 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.

Can someone please provide an explanation. I will post the OA later.

Thnx

Kudos [?]: 1 [0], given: 0

Director
Joined: 14 Oct 2007
Posts: 751

Kudos [?]: 232 [0], given: 8

Location: Oxford
Schools: Oxford'10

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09 Apr 2008, 12:13
I have identified the key phrases in the questions and tried to eliminate the choices accordingly.

perpetual_stud wrote:
17. 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. no obvious serious disadvantage - besides a lower actual cost could be an advantage
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment. this is wrong on two fronts. Firstly, the interest rates could go up. Secondly the delay in implementing the cost cutting measures could mean more money lost compared with the interest rate saving
(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. "Some cost cutting measures"..this is very vague. also this statement says that the investment WILL pay off...slowly..but still it WILL pay off..therefore this isn't a disadvantage
(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. This is the key disadvantage. They could miss the opportunity to get more market share
(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, no serious advantage/disadvantage, this could go either way

Can someone please provide an explanation. I will post the OA later.

Thnx

Kudos [?]: 232 [0], given: 8

Intern
Joined: 05 Jul 2006
Posts: 9

Kudos [?]: 1 [0], given: 0

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09 Apr 2008, 12:29
Thanks for a great explanation. Yes I missed "remains constant" and thus choose a wrong choice.

The OA is D.

Can you please suggest any strategies for handling this type of CR where you have read the stimulus very very closely. Sometimes you pick the wrong choice not because of your reasoning but because you missed some key information in the stimulus.

Kudos [?]: 1 [0], given: 0

Director
Joined: 14 Oct 2007
Posts: 751

Kudos [?]: 232 [0], given: 8

Location: Oxford
Schools: Oxford'10

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09 Apr 2008, 12:33
I wish I had a "formula" for CR. I am not confident with CR myself, but occaisionaly some of these questions jump out at me.
for CR i always use POE, and come down to two choices, then its a matter of reading the question stem and trusting your instinct a bit more.

Kudos [?]: 232 [0], given: 8

Re: CR 1   [#permalink] 09 Apr 2008, 12:33
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