The price the government pays for standard weapons purchased from mili

Question

The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.

(B) The rate of inflation has varied considerably over the past twenty years.

(C) The contractual price will be greatly affected by the cost of materials used for the products.

(D) Many taxpayers question the amount of money the government spends on military contracts.

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

GMATNinja · Accepted Answer

We need to find the answer choice that is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts. Before we do that, let's make sure we understand what exactly "historical costing" is:

"The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called 'historical costing.'" 
 Historical costing allows contractors to add a percentage increase (based on the current rate of inflation) to the previous year's contractual price. In other words, instead of simply charging last year's price, the contractor's can charge the government last year's price PLUS a percentage increase to adjust for inflation. 
 "Historical costing allows contractors to protect their profits." - For example, if they charged a certain price last year and since then there has been significant inflation, charging the  same  price would actually mean  lower  profits for the contractors. Instead, the contractors can charge last year's price PLUS an extra amount to make up for the inflation.

Historical costing clearly protects the contractors profits from inflation. But does that mean that historical costing is an economically sound pricing method for military contracts? We need to find an answer choice that could serve as a basis for a criticism of historical costing as an economically sound pricing method for military contracts. In other words, we need something that suggests that historical costing might NOT be an economically sound pricing method for military contracts.

What if last year's contract was a bad deal? For example, what if the contractor used inefficient methods and thus included unnecessary costs when determining the prices? Without historical costing, the use of more efficient methods should drive down this year's prices. But with historical costing, even if the contractor uses more efficient methods, prices will  increase  with inflation.

Thus, the government might continue to pay for past inefficient use of funds. (A) represents a possible problem with historical costing, so keep this one.

With historical costing, the percentage increase is based on the current inflation rate. It doesn't matter whether the inflation rate is changing. The changes to the prices will reflect the variations in the inflation rate. Choice (B) does not represent a problem with historical costing, so eliminate this one.

Of course the contractual price will be affected by the cost of the materials. If the cost of the materials increases with inflation, historical costing will allow the prices to increase accordingly. Choice (C) does not describe a problem with historical costing, so eliminate this one.

Whether a pricing method is economically sound does not depend on how taxpayers feel about government spending on military contracts. The government might use the most economically sound methods, and taxpayers could still question the total amount that the government spends on military contracts. Choice (D) is irrelevant and can be eliminated.

Just because a contractor's profits are protected by historical costing does not mean there is no incentive to innovate. Contractors would still have incentive to come up with new and better weapons. If they don't, their competitors certainly will.

More importantly, the passage specifically talks about  standard  weapons, not  innovative  weapons. The government might use historical costing for standard weapons contracts and  other  pricing methods for innovative weapons. In that case, it wouldn't matter whether historical costing encourages the development of innovative weapons.

Choice (A) is the best answer.

firasath · Answer

The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
 This correctly shows that bad deals in the past will continue to affect contracts in the future. Pick A.

(B) The rate of inflation has varied considerably over the past twenty years.
i f the rate of inflation varies, it will still increase the cost either by a little or alot. this doesnt say anything about historical prices .

(C) The contractual price will be greatly affected by the cost of materials used for the products.
 Out of scope. question asks about the affect of historical pricing, not cost of materials

(D) Many taxpayers question the amount of money the government spends on military contracts.
 Using opinions for an argument when these opinions weren't mentioned in the stimulus is wrong.

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
 The development of new weapons is not at issue.

Swapnilvpatil · Answer

The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
-  Clearly defines why it is not economically sound pricing
 
(B) The rate of inflation has varied considerably over the past twenty years.
-  It does not criticize the method. Just gives us extra information

(C) The contractual price will be greatly affected by the cost of materials used for the products.
 - Nothing is mentioned about cost of material used

(D) Many taxpayers question the amount of money the government spends on military contracts.
 - Nothing is mentioned about tax payers
 
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
-  Development of innovative weapons is irrelevant.

gmatsaga · Answer

Premise: Price determined by historical costing
Premise: Historical costing to protect profits
Conclusion: None

What needs to be done: Criticize historical costing

The government might continue to pay for past inefficient use of funds. -  This is what we want. It will be grounds to criticize the point of historical costing.

The rate of inflation has varied considerably over the past twenty years. -  If you understood the passage then this is an automatic eliminate. Inflation necessitated the need for historical pricing.

The contractual price will be greatly affected by the cost of materials used for the product. -  Now this is out of scope. And of course, this won't criticize.

Many taxpayers question the amount of money the government spends on military contracts. -  This is also out of scope.

The pricing method based on historical costing might not encourage the development of innovative weapons.  Ah! This is a very tempting answer choice. But what makes it wrong? Read it carefully, it says "INNOVATIVE WEAPONS." The passage, in contrast, just talks about "STANDARD WEAPONS." This is a trap! This goes to show how ONE WORD COULD MAKE OR BREAK an answer choice.

sarb · Answer

Why A is correct and B is not:

question is: Which of the statements. if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

so we are looking for a option that will criticize historical costing.

for option A :The government might continue to pay for past inefficient use of funds.
explanation: If the initial pricing itself was wrong then the Govt will continue to pay for its past error in the future because of historical pricing this is weakening point. this point is criticizing the historical pricing method, this is what we are looking for.

for option B: The rate of inflation has varied considerably over the past twenty years.
explanation: is this point criticizing historical pricing? NO. rather this point is supporting historical costing

hope it helps

carcass · Answer

replying to a PVT message here I am

Now breaking down the argument

In a few words that means: the gov pay the industry based on the contract stipulated in the first ionstance. here, suddenly something must jumps at the top of my head

- the negative side is that I (goverment) pay the contract indipendently of whatsoever happens

- positive side is that the contract - maybe - is not influenced by the change of inflaction or other factors that comes up

Basically that means: the situation is freeze, always

(A) The government might continue to pay for past inefficient use of funds.

This is what Im looking for: if the contract by the gov is suscibed (right or wrong) we HAVE TO pay, anyway

(B) The rate of inflation has varied considerably over the past twenty years.

The rate is out of scope

(C) The contractual price will be greatly affected by the cost of materials used for the products.

The cost of material is NOT the key point of the argument. We care ONLy about of the dynamic of the contract itself

(D) Many taxpayers question the amount of money the government spends on military contracts.

Out od scope

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

Out of scope

regards

btg9788 · Answer

I was trying to pick between A and B. I picked A.

The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds. -  This means if the past price was more than the practical estimate, it would affect future prices as well. Correct choice.
 
(B) The rate of inflation has varied considerably over the past twenty years.-  This choice confused me. But, say the rate was lower and lower for the past 20 years, it still makes sense to add some delta value to the price quote. I am assuming that the increase was +ve. But A sounds better as the price did not have any basis in the first place. Also, the more important fact is that it cannot be a basis for criticizing the method

(C) The contractual price will be greatly affected by the cost of materials used for the products.
(D) Many taxpayers question the amount of money the government spends on military contracts.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

pqhai · Answer

Hi naaangerleyanyetei.
I'm happy to help.

ANALYZE THE STIMULUS: 
  
Fact: The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” 
Fact: Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.
 Conclusion:  “historical costing’ is an economically sound pricing method for military contracts

KEY formula is :   BEGINNING PRICE + ADJUSTMENT = NEW PRICE

Assumption:  For  new price to be correct , we need   BOTH  beginning price and adjustment MUST be correct . The argument assumes that both sources of information are correct.

ANALYZE EACH ANSWER:

(A) The government might continue to pay for past inefficient use of funds.
  Correct.   A shows that the “beginning price” may be wrong, so even though the adjustment is correct, the final price is still wrong.

(B) The rate of inflation has varied considerably over the past twenty years.
 Wrong.    SHELL GAME.   It does NOT matter how much the rate of inflation has varied, because when it change, the “new” adjustment immediately will be added to the new price.

(C) The contractual price will be greatly affected by the cost of materials used for the products.
 Wrong.   Out of scope.  The Cost of material ONLY makes the price go up and down. But the contractors can protect their profits because their final prices are correctly calculated.

(D) Many taxpayers question the amount of money the government spends on military contracts.
 Wrong.   Out of scope  100%. Nothing about “taxpayers” here.

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
 Wrong.   Out of scope.  We only talk about “price” and how to calculate it correctly. Nothing about “innovative”.

Hope it helps.

VeritasPrepBrandon · Answer

In this question, we are looking for a basis with which to criticize historical costing as being economically sound.

a) This is correct. If the government made a blunder and overpaid one year, then this pricing practice will force the government to continually overpay every year (adding an inflation percentage to an already bloated figure). This is by definition not economically sound.

b) This is why this practice is being utilized, and doesn't make it economically unsound. Wild inflation encourages the use of this practice in order to protect the contractors from inflation. This is the purpose of this practice.

c) The base contractual price can changed based on different materials, but this policy will hold the price of these materials constant + adding inflation. This does not make it economically unsound. Just like ordering more materials will increase the price, so will the cost of those materials.

d) This is very out of scope. We are not discussing whether taxpayers' agree with the money being spent overall

e) Again, out of scope. We are simply focused on whether this one practice is economically sound, not on any other ramifications of it.

I hope this helps!!!

aomundada · Answer

What is the type of this CR question? Is it a "Weaken the Argument" question?

Posted from my mobile device

CrackverbalGMAT · Answer

Yes it is. Whenever you see the words "criticism" or "flaw" coupled more importantly with the phrase "Which of the following, if true..." you can take it to be a "weaken the argument" question.

- Matoo

Elite097 · Answer

MartyTargetTestPrep   GMATGuruNY   Cr  experts When we say economicall sound , who's perspective are we taking here and why? Govt or contractor? If its contractor then C makes sense. But not clear how to choose here.

MartyTargetTestPrep · Answer

In this context, "economically sound" doesn't mean "economically viable" or "profitable." Rather, since the question is about a "method" of calculation, "economically sound" means "economically logical" or "economically valid."

Further, notice that the first sentence of the passage says that the method is used in determining "the price price the government pays." So, it appears that the question is asking about the method from the perspective of the government, though I agree that it's not 100 percent clear from whose perspective the practice would not be sound.

At the same time, we don't need to be certain about whose perspective we're talking about. since only (A) works.

(C) does not work since (C) conflicts with what the passage says.

The passage says that the contractual price is based on the current rate of inflation and the previous year’s contractual price. In that case, we have no reason to believe and have reason not to believe that, as (C) says, "the contractual price will be greatly affected by the cost of materials used for the products." After all, using such a method, the parties will  not  take into account the cost of materials.

So, (C) is out, and the only possible answer is (A).

GMATGuruNY · Answer

This is a weaken CR.
It is given as a PREMISE that  historical costing allows contractors to protect their profits .
A premise is an accepted FACT and thus cannot be weakened.
Implication:
The correct answer must weaken the contention that historical costing is economically sound from the perspective of the GOVERNMENT.

lehung97 · Answer

I/ My Reasoning So Far
  I’m torn between (A) and (E).

For (A): it criticizes the pricing rule because it could make the government keep paying for past inefficiency. But that feels speculative since it assumes there was inefficiency.

For (E): it says the pricing rule might discourage innovation, which also sounds plausible since guaranteed inflation-linked profits reduce motivation to invent new things. That’s also speculative but in a different direction — future rather than past.

So both feel like “might” statements.

Maybe the key is in “economically sound” — does that phrase narrow the scope to efficiency in resource use rather than innovation?

II/ My Questions
  
1/ Am I right that “economically sound” means the argument should focus strictly on financial efficiency (price fairness, waste, or cost-effectiveness), not on innovation or technological progress?

2/ If both (A) and (E) rely on speculation, is (A) stronger only because it attacks the core mechanism (pricing logic) rather than a side consequence (innovation incentives)?

3/ How does the time focus (past inefficiency vs. future innovation) shift the strength of each criticism?

The price the government pays for standard weapons purchased from mili

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Critical Reasoning (CR) Questions

The price the government pays for standard weapons purchased from mili

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards