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Updated on: 29 Oct 2023, 05:33
Originally posted by Sajjad1994 on 04 Mar 2022, 08:00.
Last edited by BottomJee on 29 Oct 2023, 05:33, edited 3 times in total.
Last edited by BottomJee on 29 Oct 2023, 05:33, edited 3 times in total.
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A Pen manufacturing company, SmartPens Ltd, has designed a new technology that, it claims, would help people write more neatly. However, the existing manufacturing plant doesn’t allow the production of these newer types of pens. Therefore, the company is considering three proposals for the production of the new pens:
SmartPens knows that developing its own unit would take at least 4 months during which it will lose the possible sales, if 1t doesn’t outsource. The expected sale is around 10K units for the first month, increasing by 10K units every month.
Besides, setting up own unit will need an upfront cost of $1mn for a 400K unit capacity. The company fears that such a high upfront investment for an untested technology could be a big risk and may get rejected by the board.
The per-unit cost of production in its own plant is expected to be $0.4
- Invest in own production unit
- Outsource production to Company A
- Outsource production to Company B
SmartPens knows that developing its own unit would take at least 4 months during which it will lose the possible sales, if 1t doesn’t outsource. The expected sale is around 10K units for the first month, increasing by 10K units every month.
Besides, setting up own unit will need an upfront cost of $1mn for a 400K unit capacity. The company fears that such a high upfront investment for an untested technology could be a big risk and may get rejected by the board.
The per-unit cost of production in its own plant is expected to be $0.4
$0.56/unit
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
85%
(hard)
Question Stats:
65% (03:36) correct
35%
(03:18)
wrong
based on 904
sessions
History
Date
Time
Result
Not Attempted Yet
1. What is the overall cost per working unit for SmartPens Ltd from company A, assuming an order size of 10K units and that the defective units are thrown away by SmartPens Ltd?
| $0.52/unit | |
| $0.54/unit | |
| $0.56/unit | |
| $0.61/unit | |
| $0.65/unit |
ShowHide Answer
Official Answer
$0.56/unit
10 Months
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
95%
(hard)
Question Stats:
44% (01:52) correct
56%
(01:56)
wrong
based on 864
sessions
History
Date
Time
Result
Not Attempted Yet
2. Assuming that the company’s demand meets projections, what is the maximum number of months that the company can wait before it needs to start building its own factory?
| 5 Months | |
| 10 Months | |
| 11 Months | |
| 13 Months | |
| 16 Months |
ShowHide Answer
Official Answer
10 Months
An initial survey by a well-respected company has suggested strong demand for the new pen.
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
55%
(hard)
Question Stats:
44% (00:59) correct
56%
(01:07)
wrong
based on 941
sessions
History
Date
Time
Result
Not Attempted Yet
3. Which of the following statements, if true, would most strongly motivate SmartPens to start investing in its own production unit from the beginning?
| Defect rate for Company A and Company B products are higher than initially estimated. | |
| Development of new unit would take around two months, instead of four months as initially thought. | |
| An initial survey by a well-respected company has suggested strong demand for the new pen. | |
| Company A charges less per-unit to other customers than its quote for SmartPens. | |
| Company A charges less per-unit to other customers than its quote for SmartPens. |
ShowHide Answer
Official Answer
An initial survey by a well-respected company has suggested strong demand for the new pen.
$0.61/unit
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
5%
(low)
Question Stats:
91% (01:06) correct
9%
(01:12)
wrong
based on 676
sessions
History
Date
Time
Result
Not Attempted Yet
4. What is the overall cost per working unit for SmartPens Ltd from company B, assuming an order size of 10K units and that the defective units are thrown away by SmartPens Ltd?
| $0.52/unit | |
| $0.54/unit | |
| $0.56/unit | |
| $0.61/unit | |
| $0.65/unit |
ShowHide Answer
Official Answer
$0.61/unit
Source: e-GMAT
04 Mar 2022, 22:17
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Question 1：
Company A - 0.56/Unit
Company B - 0.61/Unit
For company A: Each unit costs 0.5+0.02=0.52
Its defective rate is 7.5%.
Order size does not change ultimate unit price, so just think of 100 pens.
(100 * 0.52)/92.5=0.562...
For company B whose defective rate is 2%.
(0.60*100)/98 = 0.612...
Question 2：My answer is (B) 10 months.
The expected sale is around 10K units for the first month, increasing by 10K units every month.
Company A has a maximum monthly spare capacity for production of 50K pens.
Company B has a maximum monthly spare capacity for production of 100K pens.
At first, I thought the answer is 15 because both companies can be tapped. There is no answer choice of 15.
So, SmartPens can only pick one company. Company B it is.
Question 3: My answer is (C). This one is a bit tricky as we have very limited information about the scenario.
(A) How higher than initially estimated? If just 1% higher, there should be be the cause of alarm. If 100% higher, maybe. I eliminate (A) for the lack of clarity.
(B) Very attractive as it would reduce lost sales by 7k. But my reading is that the company is more concerned with higher investment for an untested tech: "The company fears that such a high upfront investment for an untested technology could be a big risk and may get rejected by the board." So the accelerated ramp-up time, while definitely a positive, may not be the game-changer.
(C) If the demand is more assured, the company's investment is well-justified. Even if they outsource to either company A or B, they still have to produce pens in-house after 10 months at most.
(D) How much more? Not a big deal if it is just 0.01 cent more per pen. Plus, this is new tech (with patent protection I assume). How can A quote the same produce for another company? Besides, an alternative option can be company B, not necessarily own factory.
(E) Can be easily eliminated as it helps justify outsourcing options.
Company A - 0.56/Unit
Company B - 0.61/Unit
For company A: Each unit costs 0.5+0.02=0.52
Its defective rate is 7.5%.
Order size does not change ultimate unit price, so just think of 100 pens.
(100 * 0.52)/92.5=0.562...
For company B whose defective rate is 2%.
(0.60*100)/98 = 0.612...
Question 2：My answer is (B) 10 months.
The expected sale is around 10K units for the first month, increasing by 10K units every month.
Company A has a maximum monthly spare capacity for production of 50K pens.
Company B has a maximum monthly spare capacity for production of 100K pens.
At first, I thought the answer is 15 because both companies can be tapped. There is no answer choice of 15.
So, SmartPens can only pick one company. Company B it is.
Question 3: My answer is (C). This one is a bit tricky as we have very limited information about the scenario.
(A) How higher than initially estimated? If just 1% higher, there should be be the cause of alarm. If 100% higher, maybe. I eliminate (A) for the lack of clarity.
(B) Very attractive as it would reduce lost sales by 7k. But my reading is that the company is more concerned with higher investment for an untested tech: "The company fears that such a high upfront investment for an untested technology could be a big risk and may get rejected by the board." So the accelerated ramp-up time, while definitely a positive, may not be the game-changer.
(C) If the demand is more assured, the company's investment is well-justified. Even if they outsource to either company A or B, they still have to produce pens in-house after 10 months at most.
(D) How much more? Not a big deal if it is just 0.01 cent more per pen. Plus, this is new tech (with patent protection I assume). How can A quote the same produce for another company? Besides, an alternative option can be company B, not necessarily own factory.
(E) Can be easily eliminated as it helps justify outsourcing options.
05 Mar 2022, 08:26
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Competition mode is off now
OAs are:
Question #1
Company A: 0.56/Unit
Company B: 0.61/Unit
Question #2
B
Question #3
C
OAs are:
Question #1
Company A: 0.56/Unit
Company B: 0.61/Unit
Question #2
B
Question #3
C
