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# Gally is aiming at starting a new business

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Manager
Joined: 20 Apr 2018
Posts: 177
Concentration: Technology, Nonprofit
WE: Analyst (Non-Profit and Government)

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16 Aug 2018, 22:25
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Difficulty:

95% (hard)

Question Stats:

45% (01:25) correct 55% (01:43) wrong based on 384 sessions

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Gally is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries. These contracts will include services such as rebalancing, repairing the bearings, replacing the pump impellers as they wear out etc. Since Gally is a newcomer, it aims to gain market by offering contracts at reduced prices. Gally's management raises concerns that the revenue from these contracts will not be enough to cover their costs.

The answer to which of the following questions would help evaluate the management’s concerns?

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions

B. Whether Gally can acquire similar number of contracts without reducing its prices.

C. Whether Gally offers premium services that others charge at standard prices, at a very low cost.

D. Whether Gally targets refineries that are flush with money and can pay for repairs.

E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs.
Intern
Joined: 23 Mar 2018
Posts: 13

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29 Aug 2018, 01:45
1
sandman13 wrote:
Gally is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries. These contracts will include services such as rebalancing, repairing the bearings, replacing the pump impellers as they wear out etc. Since Gally is a newcomer, it aims to gain market by offering contracts at reduced prices. Gally's management raises concerns that the revenue from these contracts will not be enough to cover their costs.

The answer to which of the following questions would help evaluate the management’s concerns?

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions

B. Whether Gally can acquire similar number of contracts without reducing its prices.

C. Whether Gally offers premium services that others charge at standard prices, at a very low cost.

D. Whether Gally targets refineries that are flush with money and can pay for repairs.

E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs.

Let R = 1X, then basically the management dudes are afraid that cost would be 2X (or more). Let's weaken their concern by looking for a scenario in which Cost = 0.5X

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions => sounds like the cost could be 0.5X. Yes: if they can target new R with fewer & inexpensive maintenance, hence the revenue > cost. No: if they can not target new R..., the revenue < cost
B. Whether Gally can acquire similar number of contracts without reducing its prices => huh? the plan is to offer contracts with reduced prices, hence this choice is out of scope
C. Whether Gally offers premium services that others charge at standard prices, at a very low cost. => err, premium services, who cares. The argument only concerns about the 'reduced prices'
D. Whether Gally targets refineries that are flush with money and can pay for repairs. => they can pay however they want, but this does not tell us the about the 0.5X cost thing
E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs. => Lets apply the Variance test, whether they can estimate the annual cost or not does not affect the management's concern at all? even if they can reliably estimate the average annual repair costs, the figure could still be either 2X or 0.5X. Now we might argue that since they can estimate the cost, they are able to target the refineries with 0.5X (with lower cost); however, 0.5X estimated at the beginning of the year can turn out to be 2X as actual cost depending on a lot of unexpected situations .
Intern
Joined: 23 Jun 2015
Posts: 29

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29 Aug 2018, 06:33
sandman13 wrote:
Gally is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries. These contracts will include services such as rebalancing, repairing the bearings, replacing the pump impellers as they wear out etc. Since Gally is a newcomer, it aims to gain market by offering contracts at reduced prices. Gally's management raises concerns that the revenue from these contracts will not be enough to cover their costs.

The answer to which of the following questions would help evaluate the management’s concerns?

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions

B. Whether Gally can acquire similar number of contracts without reducing its prices.

C. Whether Gally offers premium services that others charge at standard prices, at a very low cost.

D. Whether Gally targets refineries that are flush with money and can pay for repairs.

E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs.

Hello ..
I don't think A gives any clarity for management's concerns . I think Option B is better that the answer for this will evaluate the management's concerns .
Please clarify more with explanation if I am wrong .
Intern
Joined: 22 Mar 2018
Posts: 18

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29 Aug 2018, 07:49
Gally is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries. These contracts will include services such as rebalancing, repairing the bearings, replacing the pump impellers as they wear out etc. Since Gally is a newcomer, it aims to gain market by offering contracts at reduced prices. Gally's management raises concerns that the revenue from these contracts will not be enough to cover their costs.
// First we need to check what is management's concern? The management's concern is that they won't be able to cover the costs associated with these contracts//

The answer to which of the following questions would help evaluate the management’s concerns?
//Using the information given above we can conclude that management is concerned about the revenue from these contracts//

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions// Correct: Because if they get such refineries then their investment would be less at the same price and their profit would increase. On the other hand if they don't get such refineries then their investment would increase and profit will decrease//

B. Whether Gally can acquire similar number of contracts without reducing its prices.// Out of scope //

C. Whether Gally offers premium services that others charge at standard prices, at a very low cost.// Out of scope again. You can negate this option and check that the conclusion remains the same //

D. Whether Gally targets refineries that are flush with money and can pay for repairs.// Even if they pay for the treatments, how can be the problem of lower profits be solved?//

E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs.// Out of scope as this option focuses on getting information about their average annual repair costs which is not the aim //

Hope this helps ...
Director
Joined: 09 Mar 2017
Posts: 516
Location: India
Concentration: Marketing, Organizational Behavior
WE: Information Technology (Computer Software)

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29 Aug 2018, 08:16
karnaidu wrote:
sandman13 wrote:
Gally is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries. These contracts will include services such as rebalancing, repairing the bearings, replacing the pump impellers as they wear out etc. Since Gally is a newcomer, it aims to gain market by offering contracts at reduced prices. Gally's management raises concerns that the revenue from these contracts will not be enough to cover their costs.

The answer to which of the following questions would help evaluate the management’s concerns?

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions

B. Whether Gally can acquire similar number of contracts without reducing its prices.

C. Whether Gally offers premium services that others charge at standard prices, at a very low cost.

D. Whether Gally targets refineries that are flush with money and can pay for repairs.

E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs.

Hello ..
I don't think A gives any clarity for management's concerns . I think Option B is better that the answer for this will evaluate the management's concerns .
Please clarify more with explanation if I am wrong .

Your point would have been correct if the conclusion were concerned about overall revenue. However, if you read the conclusion closely, you will notice that the concern is about "the revenue from these contracts ".
To clarify, assume Gally has taken a contract from company X at reduced price. The argument is not concerned whether Gally can attract more contracts from companies A, B or C and hence make an overall profit. The conclusion deals only with the revenue from contract X. Because of this, B holds incorrect.
If according to option A, contract X is from such a refinery that requires Gally to make inexpensive repairs and fewer adjustments, then revenue from that particular contact X will be enough to cover their costs.
Hope it helped.
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Manager
Joined: 10 Apr 2018
Posts: 108
GPA: 3.56
WE: Engineering (Computer Software)

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30 Aug 2018, 23:04
linhqm wrote:
Let R = 1X, then basically the management dudes are afraid that cost would be 2X (or more). Let's weaken their concern by looking for a scenario in which Cost = 0.5X

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions => sounds like the cost could be 0.5X. Yes: if they can target new R with fewer & inexpensive maintenance, hence the revenue > cost. No: if they can not target new R..., the revenue < cost
B. Whether Gally can acquire similar number of contracts without reducing its prices => huh? the plan is to offer contracts with reduced prices, hence this choice is out of scope
C. Whether Gally offers premium services that others charge at standard prices, at a very low cost. => err, premium services, who cares. The argument only concerns about the 'reduced prices'
D. Whether Gally targets refineries that are flush with money and can pay for repairs. => they can pay however they want, but this does not tell us the about the 0.5X cost thing
E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs. => Lets apply the Variance test, whether they can estimate the annual cost or not does not affect the management's concern at all? even if they can reliably estimate the average annual repair costs, the figure could still be either 2X or 0.5X. Now we might argue that since they can estimate the cost, they are able to target the refineries with 0.5X (with lower cost); however, 0.5X estimated at the beginning of the year can turn out to be 2X as actual cost depending on a lot of unexpected situations .

I had narrowed to option 'A' and option 'E', was not convinced with explanation for 'A' - even the official explanation.
Your explanation resolved this and I got to know where my critical thinking just slipped.
Thanks for the precise explanation.

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Intern
Joined: 22 Apr 2017
Posts: 6

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04 Sep 2018, 11:36
linhqm

i have two doubts with the explanation you have given

1) if a were true , how do we know that the management is raising a concern because the revenue from the contract is lower than the cost for servicing these low maintanance plants ...

2) in response to your comment " depending on various unexpected situations " ... notice that the option E clearly says that the cost can be calculated " RELIABLY "

kindly help me solve these two doubts .. thankyou

Posted from my mobile device
Intern
Joined: 22 Apr 2017
Posts: 6

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04 Sep 2018, 11:37
linhqm

i have two doubts with the explanation you have given

1) if a were true , how do we know that the management is raising a concern because the revenue from the contract is lower than the cost for servicing these low maintanance plants ...

2) in response to your comment " depending on various unexpected situations " ... notice that the option E clearly says that the cost can be calculated " RELIABLY "

kindly help me solve these two doubts .. thankyou

Posted from my mobile device
Intern
Joined: 17 Aug 2016
Posts: 16

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04 Sep 2018, 18:29
I could not understand why answer choice (E) is wrong.
Intern
Joined: 23 Mar 2018
Posts: 13

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05 Sep 2018, 08:22
pranavrajmohan1993 wrote:
linhqm

i have two doubts with the explanation you have given

1) if a were true , how do we know that the management is raising a concern because the revenue from the contract is lower than the cost for servicing these low maintanance plants ...

2) in response to your comment " depending on various unexpected situations " ... notice that the option E clearly says that the cost can be calculated " RELIABLY "

kindly help me solve these two doubts .. thankyou

Posted from my mobile device

I’ll try to explain per my thinking. Hope it will help.
Keep in mind the management concern is that they wont be able to cover the cost associated with the discounted contract. So in option E, whether you can RELIABLY estimate the cost does not matter. I’m sure you’re able to eliminate B, C, and D easily, leaving A & E. E is GMAT’s trick. Most of the time when I pick the wrong choices was becoz those choice were tempting. Now if you were the GMAT people, you think you’ll make it that easy for the students to pick the right answer? Rather, you’ll need to trick them into picking the wrong answer & thats what E does.
For example, you are concerning that the scholarship/assistantship you are receiving will not be able to cover the cost of living. So what is your solution? Will you try to find a way to reduce the living cost such as cooking at home, sharing house with more people... (aka the ‘relatively inexpensive mainternance cost’) or will you go online to a reliable source to reliably estimate the cost of living? What if at the beginning of the year you estimate the cost to be \$700/month, but at the end of the year it goes up to \$900/month because the landlord suddenly increases the price (even though at the beginning you had everything reliably estimated). In real life this estimate thing is always fluctuated, especially in house construction (in my country the rule is to have at least 50% more on top of the planned budget for the construction)
Hope it helps
Manager
Joined: 22 Sep 2014
Posts: 99

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05 Sep 2018, 15:13
Annual contract = fixed revenue ???

If so, I would understand why a makes sense ..otherwise , a wouldn’t make any sense
Intern
Joined: 23 Mar 2018
Posts: 13

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05 Sep 2018, 19:31
newyork2012 wrote:
Annual contract = fixed revenue ???

If so, I would understand why a makes sense ..otherwise , a wouldn’t make any sense

It is possible in this case, but i dont think you should apply this thinking for other questions relating to revenues and contracts. If you shaped yourself into thinking annual contract = fixed revenue you might get it wrong for other questions. Any contract has terms & conditions governing different aspects including either fixed revenue or pay-per-service with a fixed agency fee and so on and so forth. It has to depend on the context i guess. I think this is not the best solution but it's best among the 5 choices. I would suggest you to try to do similar problems and you'll find the pattern hidden behind those answers
Intern
Joined: 06 Mar 2018
Posts: 35
Location: India
GRE 1: Q160 V150
GPA: 2.7

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21 Sep 2018, 03:33
aragonn Can you help me to understand this question.

Why B can't be the answer ?
SC Moderator
Joined: 23 Sep 2015
Posts: 1361

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21 Sep 2018, 06:16
The answer to which of the following questions would help evaluate the management’s concerns?
Question's understanding:
management’s concerns - the revenue from these contracts will not be enough to cover their costs. ---- and we need to evaluate this choice.

Why M is concerned - it aims to gain market by offering contracts at reduced prices. reduced price means they will get less then what they had anticipated. At this moment think what can be a gain factor with this. May be new partnership and future advantages.

With these thoughts, lets do POE.

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions --- new partnership as we have thought in advance inexpensive maintenance actions, which means less effort and more saving.

B. Whether Gally can acquire similar number of contracts without reducing its prices. ---- let say yes. now these contracts must be high number and this one is new comer. we have to speculate a lot which is nor good. in CR, the moment you speculate something means it is not a good choice.

C. Whether Gally offers premium services that others charge at standard prices, at a very low cost. ---- PS is not the concern here, OOS

D. Whether Gally targets refineries that are flush with money and can pay for repairs. ---- even if they do, this will not be good to cover.

E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs. --- not that effective, with out making much of the impact.

A is best of the lot.
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# Gally is aiming at starting a new business

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