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Excess inventory, a massive problem for many businesses

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Excess inventory, a massive problem for many businesses [#permalink]

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New post 15 Jul 2015, 05:56
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Excess inventory, a massive problem for many businesses, has several causes, some of which are unavoidable. Overstocks may accumulate through production overruns or errors. Certain styles and colors prove unpopular. With some products—computers and software, toys, and books—last year’s models are difficult to move even at huge discounts. Occasionally the competition introduces a better product. But in many cases the public’s buying tastes simply change, leaving a manufacturer or distributor with thousands (or millions) of items that the fickle public no longer wants.

One common way to dispose of this merchandise is to sell it to a liquidator, who buys as cheaply as possible and then resells the merchandise through catalogs, discount stores, and other outlets. However, liquidators may pay less for the merchandise than it cost to make it. Another way to dispose of excess inventory is to dump it. The corporation takes a straight cost write-off on its taxes and hauls the merchandise to a landfill. Although it is hard to believe, there is a sort of convoluted logic to this approach. It is perfectly legal, requires little time or preparation on the company’s part, and solves the problem quickly. The drawback is the remote possibility of getting caught by the news media. Dumping perfectly useful products can turn into a public relations nightmare.Children living in poverty are freezing and XYZ Company has just sent 500 new snowsuits to the local dump. Parents of young children are barely getting by and QRS Company dumps 1,000 cases of disposable diapers because they have slight imperfections.

The managers of these companies are not deliberately wasteful; they are simply unaware of all their alternatives. In 1976 the Internal Revenue Service provided a tangible incentive for businesses to contribute their products to charity. The new tax law allowed corporations to deduct the cost of the product donated plus half the difference between cost and fair market selling price, with the provison that deductions cannot exceed twice cost. Thus, the federal government sanctions—indeed, encourages—an above-cost federal tax deduction for companies that donate inventory to charity.

1. The author mentions each of the following as a cause of excess inventory EXCEPT
(A) production of too much merchandise
(B) inaccurate forecasting of buyers’ preferences
(C) unrealistic pricing policies
(D) products’ rapid obsolescence
(E) availability of a better product
[Reveal] Spoiler:
OA:C


2. The passage suggests that which of the following is a kind of product that a liquidator who sells to discount stores would be unlikely to wish to acquire?
(A) Furniture
(B) Computers
(C) Kitchen equipment
(D) Baby-care products
(E) Children’s clothing
[Reveal] Spoiler:
OA:B


3. The passage provides information that supports which of the following statements?
(A) Excess inventory results most often from insufficient market analysis by the manufacturer.
(B) Products with slight manufacturing defects may contribute to excess inventory.
(C) Few manufacturers have taken advantage of the changes in the federal tax laws.
(D) Manufacturers who dump their excess inventory are often caught and exposed by the news media.
(E) Most products available in discount stores have come from manufacturers’ excess-inventory stock.
[Reveal] Spoiler:
OA:B


4. The author cites the examples in lines 25-29 most probably in order to illustrate
(A) the fiscal irresponsibility of dumping as a policy for dealing with excess inventory
(B) the waste-management problems that dumping new products creates
(C) the advantages to the manufacturer of dumping as a policy
(D) alternatives to dumping explored by different companies
(E) how the news media could portray dumping to the detriment of the manufacturer’s reputation
[Reveal] Spoiler:
OA:E


5. By asserting that manufacturers “are simply unaware” (line 31), the author suggests which of the following?
(A) Manufacturers might donate excess inventory to charity rather than dump it if they knew about the provision in the federal tax code.
(B) The federal government has failed to provide sufficient encouragement to manufacturers to make use of advantageous tax policies.
(C) Manufacturers who choose to dump excess inventory are not aware of the possible effects on their reputation of media coverage of such dumping.
(D) The manufacturers of products disposed of by dumping are unaware of the needs of those people who would find the products useful.
(E) The manufacturers who dump their excess inventory are not familiar with the employment of liquidators to dispose of overstock.
[Reveal] Spoiler:
OA:A


6. The information in the passage suggests that which of the following, if true, would make donating excess inventory to charity less attractive to manufacturers than dumping?
(A) The costs of getting the inventory to the charitable destination are greater than the above-cost tax deduction.
(B) The news media give manufacturers’ charitable contributions the same amount of coverage that they give dumping.
(C) No straight-cost tax benefit can be claimed for items that are dumped.
(D) The fair-market value of an item in excess inventory is 5 times its cost.
(E) Items end up as excess inventory because of a change in the public’s preferences.
[Reveal] Spoiler:
OA:A


7. Information in the passage suggests that one reason manufacturers might take advantage of the tax provision mentioned in the last paragraph is that
(A) there are many kinds of products that cannot be legally dumped in a landfill
(B) liquidators often refuse to handle products with slight imperfections
(C) the law allows a deduction in excess of the cost of manufacturing the product
(D) media coverage of contributions of excess-inventory products to charity is widespread and favorable
(E) no tax deduction is available for products dumped or sold to a liquidator
[Reveal] Spoiler:
OA:C

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Re: Excess inventory, a massive problem for many businesses [#permalink]

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New post 15 Jul 2015, 11:03
does not seem like a 600-700 question. The answers are quite straight forward. Thanks any ways :)
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Re: Excess inventory, a massive problem for many businesses [#permalink]

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New post 15 Jul 2015, 17:55
rohan89 wrote:
does not seem like a 600-700 question. The answers are quite straight forward. Thanks any ways :)



Great, Can you please provide a detailed explanation for questions 2,3,7.
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New post 16 Jul 2015, 00:26
I do not understand question 2, pls, help
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Re: Excess inventory, a massive problem for many businesses [#permalink]

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New post 25 Dec 2017, 00:08
For Question no.5, why is answer A rather than D.
Because Federal tax laws came later in 1976,but managers were unaware of needs of people . So D looks better than A
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Re: Excess inventory, a massive problem for many businesses [#permalink]

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New post 30 Dec 2017, 16:23
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Quote:
5. By asserting that manufacturers “are simply unaware” (line 31), the author suggests which of the following?
(A) Manufacturers might donate excess inventory to charity rather than dump it if they knew about the provision in the federal tax code.
(B) The federal government has failed to provide sufficient encouragement to manufacturers to make use of advantageous tax policies.
(C) Manufacturers who choose to dump excess inventory are not aware of the possible effects on their reputation of media coverage of such dumping.
(D) The manufacturers of products disposed of by dumping are unaware of the needs of those people who would find the products useful.
(E) The manufacturers who dump their excess inventory are not familiar with the employment of liquidators to dispose of overstock.

R999 wrote:
For Question no.5, why is answer A rather than D.
Because Federal tax laws came later in 1976,but managers were unaware of needs of people . So D looks better than A

Nothing in the passage suggests that the managers were unaware of the needs of those people. Remember, by dumping the products in a landfill, the corporation is able to take a "straight cost write-off on its taxes" (i.e. deduct the cost of the items from its taxes). If we are dealing with thousands or even millions of items, that would amount to huge tax savings. So if the company has to chose between giving the products away (with no tax benefit) or dumping them in a landfill, they would likely chose the latter to take advantage of the tax savings.

The passage also implies that companies are likely aware of the public relations risk of dumping perfectly useful products in landfills. The examples at the end of the second paragraph show how such practices could make the corporations look bad. But, again, if doing so is going to result in huge tax savings, they might reluctantly proceed with landfill dumping, even if they are aware that there are people in need (putting the company's finances over those people's needs and over the risk of looking bad if the media catches them in the act).

To summarize, even if the managers are aware of the people's needs, they still might decide to dump the items, not because they want to be wasteful but because they want to save money. However, the passage suggests that there are other alternatives of which the corporations are not aware. For example, managers might not realize that they can enjoy an even GREATER tax savings by donating the products to charity. This was not the case before the law of 1976, so some managers simply might not be aware of the option.

The primary incentive for landfill dumping was to take advantage of the tax savings. But if managers knew that they could save even more in taxes by donating excess inventory to charity, surely they would do so. Thus, choice (A) is better than choice (D).

I hope that helps!
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Excess inventory, a massive problem for many businesses [#permalink]

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New post 31 Dec 2017, 04:35
Hello GMATNinja,

Can you please explain question 2?
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RMD007 wrote:
Hello GMATNinja,

Can you please explain question 2?

Quote:
2. The passage suggests that which of the following is a kind of product that a liquidator who sells to discount stores would be unlikely to wish to acquire?
(A) Furniture
(B) Computers
(C) Kitchen equipment
(D) Baby-care products
(E) Children’s clothing

The key to this question actually lies in the first paragraph: "With some products—computers and software, toys, and books—last year’s models are difficult to move even at huge discounts." Remember, the liquidators are buying the merchandise as cheaply as possible, and we can infer that the liquidators are going to sell the merchandise at deeply discounted prices. But if some products, such as computers, are difficult to sell even at huge discounts, then the liquidators would have trouble selling those items, even if they are offered at deeply discounted prices.

Thus, it is likely that liquidators would avoid such products. (B) is the best answer.
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Re: Excess inventory, a massive problem for many businesses [#permalink]

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New post 31 Dec 2017, 20:20
GMATNinja, GMATNinjaTwo

I selected D instead of OA:B for Q#3.
Did I make mistake of recognizing often / rare?
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Re: Excess inventory, a massive problem for many businesses [#permalink]

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New post 31 Dec 2017, 20:32
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adkikani wrote:
GMATNinja, GMATNinjaTwo

I selected D instead of OA:B for Q#3.
Did I make mistake of recognizing often / rare?


I think I can try this.

Quote:
3. The passage provides information that supports which of the following statements?
(A) Excess inventory results most often from insufficient market analysis by the manufacturer.
(B) Products with slight manufacturing defects may contribute to excess inventory.
(C) Few manufacturers have taken advantage of the changes in the federal tax laws.
(D) Manufacturers who dump their excess inventory are often caught and exposed by the news media.
(E) Most products available in discount stores have come from manufacturers’ excess-inventory stock.


Please refer to below part of the passage:
Quote:
The drawback is the remote possibility of getting caught by the news media. Dumping perfectly useful products can turn into a public relations nightmare.


In this part, author says that there is a possibility that manufacturer may get caught by the news media and this can turn into a public relations nightmare. While this statement indicates possibility, option D goes far to say that these Manufacturers are OFTEN caught and this is not mentioned in the passage.

Hope this helps.
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Re: Excess inventory, a massive problem for many businesses   [#permalink] 31 Dec 2017, 20:32
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