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# Eton Company, an auto parts manufacturer, wants to extend its network

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Manager
Joined: 26 Dec 2015
Posts: 236
Location: United States (CA)
Concentration: Finance, Strategy
WE: Investment Banking (Venture Capital)
Eton Company, an auto parts manufacturer, wants to extend its network  [#permalink]

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Updated on: 11 Jan 2018, 00:43
00:00

Difficulty:

45% (medium)

Question Stats:

67% (01:57) correct 33% (01:52) wrong based on 111 sessions

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Eton Company, an auto parts manufacturer, wants to extend its network of suppliers to include Applia, a maker of a new type of ball bearing. Eton estimates that the new ball bearing will increase the operational efficiency of its steering unit by 30%. Therefore, executives of Eton believe that adding Applia to its list of suppliers will help improve Eton's profitability.

Which of the following would be most useful to investigate to determine whether the new relationship with Applia will contribute to Eton's profitability?

A) Will the new cost to purchase the new ball bearings from Applia exceed the cost of the ball bearings currently used to manufacture Eton Company's steering unit?

B) Do the buyers of Eton Company's steering units currently seek steering units with improved operational efficiency?

C) Are end users who might buy the improved steering unit aware that Eton Company is currently developing such a technology?

D) Are Eton Company's Executives aware of current broader trends in the automobile industry, including the design and manufacture of new automobile models?

E) Will the cost to purchase the new ball bearings offset the new revenue likely to be gained from the distribution of steering units equipped with the new ball bearings?

Originally posted by LakerFan24 on 10 Jan 2018, 22:26.
Last edited by LakerFan24 on 11 Jan 2018, 00:43, edited 1 time in total.
Manager
Joined: 01 Jun 2015
Posts: 207
Location: India
GMAT 1: 620 Q48 V26
Re: Eton Company, an auto parts manufacturer, wants to extend its network  [#permalink]

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11 Jan 2018, 00:03
LakerFan24 you didn't write the final line of the question stem.
E is clearly the right answer.

A) Will the new cost to purchase the new ball bearings from Applia exceed the cost of the ball bearings currently used to manufacture Eton Company's steering unit?-It doesn't matter.Suppose the present cost is 30\$ per bearing and the new bearing would cost 35\$.But the company could still make profit if that 5\$ difference would not offset the revenue.

B) Do the buyers of Eton Company's steering units currently seek steering units with improved operational efficiency?-This one is a close wrong answer.The buyers want it or not is not the question but the improved efficiency for any automobile part is always welcome.

C) Are end users who might buy the improved steering unit aware that Eton Company is currently developing such a technology?-it is irrelevant whether the end users know or not.

D) Are Eton Company's Executives aware of current broader trends in the automobile industry, including the design and manufacture of new automobile models?-this is out of scope

E) Will the cost to purchase the new ball bearings offset the new revenue likely to be gained from the distribution of steering units equipped with the new ball bearings? -This one is the right answer as no company would like to make any R&D move that would offset its revenue.So to determine the revenue offset is the most important thing.
Manager
Joined: 26 Dec 2015
Posts: 236
Location: United States (CA)
Concentration: Finance, Strategy
WE: Investment Banking (Venture Capital)
Re: Eton Company, an auto parts manufacturer, wants to extend its network  [#permalink]

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11 Jan 2018, 00:50
techiesam wrote:
LakerFan24 you didn't write the final line of the question stem.
E is clearly the right answer.

A) Will the new cost to purchase the new ball bearings from Applia exceed the cost of the ball bearings currently used to manufacture Eton Company's steering unit?-It doesn't matter.Suppose the present cost is 30\$ per bearing and the new bearing would cost 35\$.But the company could still make profit if that 5\$ difference would not offset the revenue.

B) Do the buyers of Eton Company's steering units currently seek steering units with improved operational efficiency?-This one is a close wrong answer.The buyers want it or not is not the question but the improved efficiency for any automobile part is always welcome.

C) Are end users who might buy the improved steering unit aware that Eton Company is currently developing such a technology?-it is irrelevant whether the end users know or not.

D) Are Eton Company's Executives aware of current broader trends in the automobile industry, including the design and manufacture of new automobile models?-this is out of scope

E) Will the cost to purchase the new ball bearings offset the new revenue likely to be gained from the distribution of steering units equipped with the new ball bearings? -This one is the right answer as no company would like to make any R&D move that would offset its revenue.So to determine the revenue offset is the most important thing.

My apologies -- fixed the question stem. You can easily narrow down to A or E.

I don't understand why you eliminated "A". If you're making ball bearings and you all of a sudden need to pay more for newer bearings, then you will be less profitable...take the reverse of this, and you will become more profitable.
Manager
Joined: 01 Jun 2015
Posts: 207
Location: India
GMAT 1: 620 Q48 V26
Re: Eton Company, an auto parts manufacturer, wants to extend its network  [#permalink]

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11 Jan 2018, 01:39
LakerFan24 wrote:
techiesam wrote:
LakerFan24 you didn't write the final line of the question stem.
E is clearly the right answer.

A) Will the new cost to purchase the new ball bearings from Applia exceed the cost of the ball bearings currently used to manufacture Eton Company's steering unit?-It doesn't matter.Suppose the present cost is 30\$ per bearing and the new bearing would cost 35\$.But the company could still make profit if that 5\$ difference would not offset the revenue.

B) Do the buyers of Eton Company's steering units currently seek steering units with improved operational efficiency?-This one is a close wrong answer.The buyers want it or not is not the question but the improved efficiency for any automobile part is always welcome.

C) Are end users who might buy the improved steering unit aware that Eton Company is currently developing such a technology?-it is irrelevant whether the end users know or not.

D) Are Eton Company's Executives aware of current broader trends in the automobile industry, including the design and manufacture of new automobile models?-this is out of scope

E) Will the cost to purchase the new ball bearings offset the new revenue likely to be gained from the distribution of steering units equipped with the new ball bearings? -This one is the right answer as no company would like to make any R&D move that would offset its revenue.So to determine the revenue offset is the most important thing.

My apologies -- fixed the question stem. You can easily narrow down to A or E.

I don't understand why you eliminated "A". If you're making ball bearings and you all of a sudden need to pay more for newer bearings, then you will be less profitable...take the reverse of this, and you will become more profitable.

LakerFan24

Good question.now lets examine this question with figures.

Suppose the company we are talking about makes sports car.The selling price per car is 100,000 \$ and the Production cost is 40,000 \$. So yields a profit of 60,000 \$.
Now the car is very efficient but has one problem that the steering is little stiff and sometimes makes a problem while taking turns.So that's clearly a neg point for that car i the competition market.Now the company evaluate the problem and finds that the faulty bearing is the reason behind it.
Now suppose this bearings cost more and shoots the production price up.Say Now P.C becomes 45,000 \$ and profit slides to 55,000\$.
Now suppose in the last quarter the company sold 10 of those cars and made a profit of 600,000\$

But in this quarter the company sells 15 of those car because they advertise that they have fixed the steering problem and draws more customer.So the total profit becomes 55,000*15=825,000\$

So if you go through Option A the company still can make profit with greater sales.

Now examine option E.

Suppose the bearing is too precious that it offset the revenue and profit.Now the P.C becomes 101,000\$. So no matter how many cars they sell ,the profit will always be offset by Production Cost.So it becomes the most important factor to evaluate and that's why E is correct.
Re: Eton Company, an auto parts manufacturer, wants to extend its network   [#permalink] 11 Jan 2018, 01:39
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