Hotco oil burners, designed to be used in asphalt plants, are so effic

Question

Hotco oil burners, designed to be used in asphalt plants, are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the cost savings between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years.

Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above?

A) Another manufacturer’s introduction to the market of a similarly efficient burner

B) The Clifton Asphalt plant’s need for more than one new burner

C) Very poor efficiency in the Clifton Asphalt plant’s old burner

D) A decrease in the demand for asphalt

E) A steady increase in the price of oil beginning soon after the new burner is installed

seekmba · Accepted Answer

is it (E)?

Hotco will get = amount paid for oil in last 2 years - amount paid for oil in next 2 years

now suppose the plant used 100 liters of oil in last 2 years at a price of $2 per liter....which means the plant spent $200 on oil

the price of oil is steadily increasing

now suppose the plane used 70 liters of oils (because the burner is efficient) in next 2 years at a price of $2.30 per liter....which means the plant will spend $161 on oil

Hotco will get = 200 - 161 = $39 for its burner which will be disadvantageous for Hotco because of its plan.

ChiranjeevSingh · Answer

Understanding the Passage     
 
Hotco oil burners, designed to be used in asphalt plants, are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the cost savings between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years. 
HOB (Hotco Oil burners) are so efficient that Hotco (probably the company that produces HOB) will sell one of these burners to CAP (Clifton Asphalt plant) for only the cost savings between the total expenditure of CAP on oil over the last two years and the total expenditure of CAP on oil using HOB over the next two years.

Cost Savings = the total expenditure of CAP on oil over the last two years – the total expenditure of CAP on oil using HOB over the next two years.

For example, if CAP spent Rs 100 on oil in the last two years and will spend Rs 75 on oil over the next two years, the cost savings will be Rs 100 – Rs 75 = Rs 25.

On installation, the plant will make an estimated payment, which will be adjusted after two years to equal the actual cost savings.
  When this burner is installed in CAP, CAP will make an estimated payment to Hotco; this payment will be adjusted after two years to equal the actual cost savings. (If actual cost savings happen to be more than the estimated payment, CAP will pay the difference to Hotco. If actual cost savings turn out to be less than the estimated payment, Hotco will need to pay to CAP.)

Understanding the Question Stem

Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above?

We’re looking for an option that gives a disadvantage for Hotco of the plan described above.

Can you think of any situations which could be disadvantageous to Hotco, given the above plan?

Hotco will be at a disadvantage if the cost savings go down.

Cost Savings = the total expenditure of CAP on oil over the last two years – the total expenditure of CAP on oil using HOB over the next two years.

We can see that Hotco will be at a disadvantage if the total expenditure of CAP on oil using HOB over the next two years goes up.

How can the total expenditure on oil go up?

I can think of two scenarios:

1. The price of oil goes up.
2. CAP will produce more over the next two years than it produced during the last two years. More production will require more fuel.

Some of you may be wondering that even if the price of oil goes up, the cost savings MUST still be there by using a more efficient burner. If you’re thinking so, you need to ask yourself, “cost savings in comparison to what?”

The answer would be: cost savings in comparison to using a non-efficient burner.

You’re right. There would be cost savings by using an efficient burner compared to a non-efficient burner.

However, the way the cost savings are calculated in the passage is different. In the passage, the cost savings are NOT calculated using an efficient burner over the next two years vis-a-vis using the existing burner over the next two years.

The cost savings are calculated using the expenditure on oil over the next two years vis-a-vis the expenditure on oil over the past two years.

Given this way of calculation, the changes in the price of oil have an impact on cost savings.

Similarly, some of you would also be wondering about my second point and thinking why Hotco should be at a disadvantage if CAP produces more over the next two years. The reasoning is the same. Given how cost savings are calculated, if CAP consumes more oil, cost savings will go down, and thus the payment to Hotco will go down.

The Evaluation

A) Another manufacturer’s introduction to the market of a similarly efficient burner

Incorrect.    Whether there are similarly or even more efficient burners in the market has NO IMPACT on the payment to Hotco.

Increased competition could be a disadvantage for Hotco, in general. However, increased competition would not constitute a disadvantage for Hotco w.r.t. the given payment plan.

B) The Clifton Asphalt plant’s need for more than one new burner

Incorrect.  
 CAP’s need for more than one burner could be borne out of the size of the existing burner vis-a-vis the size of Hotco burners. Or it could be that CAP already has more than one burners, and it’ll need a new burner for every old burner that it has.

However, how many Hotco burners are needed does not impact the argument since the same plan can be followed for the same burner.

Can we say that this option indicates that CAP will increase its production over the next two years?

I don’t think so. Why? Because the option doesn’t talk about the future. It’s not saying that CAP will need more burners in the next two years. It says that right now, it has a need for more than one burner. That doesn’t impact Hotco’s plan.

In addition, it’ll be helpful to note that the given plan is for one burner, and the question is w.r.t. the plan. Thus, a need for more burners will not impact the argument.

C) Very poor efficiency in the Clifton Asphalt plant’s old burner

Incorrect.   If the old burner were very inefficient (as the option says), Hotco will be at an advantage. This option goes in the OPPOSITE direction.

D) A decrease in the demand for asphalt

Incorrect.   A decrease in the demand for asphalt indicates a decrease in the production of CAP. If CAP produces less, it will use less oil over the next 2 years. As a result, cost savings will increase. As a result, Hotco will be at an advantage. Thus, this option too goes in the OPPOSITE direction.

E) A steady increase in the price of oil beginning soon after the new burner is installed

Correct.   This option relates to the first point of disadvantage we thought of. If the price of oil goes up, CAP will pay more for oil over the next two years than it would need to at the old price of oil. As a result, cost savings will be less than expected. As a result, Hotco will be at a disadvantage.

meatdumpling · Answer

I think it's E.

As I read thru them, nothing really rang a bell until I got to E. Cuz if the price of oil goes up, then the cost savings for using this new burner becomes less and less. If the price goes up really high, then cost savings go to zero or even that there's negative cost savings (or that it ends up being more expensive than before). His payment is the cost savings, so if that goes to zero that's disadvantageous to the dude. Anybody disagree with E?

heyabhi · Answer

In my opinion D will end up being profitable for Hotco

Less Demand- Less Oil used-Greater Savings ( Assuming Oil prices stay the same)--More money for HOTCO...

E is Right..

amma4u · Answer

Gosh this was a hard one > 3 minutes

E - using the key word "oil" also if the price of the oil goes up there won't be much savings Hotco would get back by selling it.

mun23 · Answer

I am not understanding the content of the argument.Need every answer choice`s explanation

polarbear14 · Answer

Situation: Hotco selling burner to CA plant
Transaction details : CA plant will pay X+Y amount (say). This breakdown can be explained as below:
X = Cost savings of the plant using old burner
Y = Future cost savings using hotco burner. (hotco is very confident about the savings as their burners are really efficient)
Now, the argument concludes with a plan whereby the CA plant will make an estimated payment(unrealised amount) & this amount will be adjusted on the actual cost savings after 2 years. So, Cost savings > estimated payment; the plant will pay hotco, the difference & vice versa.

Best way to attack this is to think about Y component, ie:- savings based on the installation of hotco burner(projected cash savings for 2 yrs). That is the unknown part. We cannot do much on X as we already know the savings using old burner(last 2 yrs)

Now if oil prices shoot up after the new installation, CA plant's savings is directly affected & thereby endangering hotco's plan, which will eventually lead hotco to a loss.

myselfhari · Answer

I am giving it a try here to explain this:

Hotco will run into losses if the diference in the amount paid by Clifton asphalt manufacturing company in the last 2 yrs is close enuf to the cost that the compnay will pay in the nex t2 yrs. ok !!
Now lets analyse the answers.

A) Another manufacturer’s introduction to the market of a similarly efficient burner -  there is no comparision with other manufacturers. irrelevant. INCORRECT

B) The Clifton Asphalt plant’s need for more than one new burner. -  out of scope. INCORRECT

C) Very poor efficiency in the Clifton Asphalt plant’s old burner. -  might sound true. but this is a catch. we cannot compare efficiencies of old and new burner.INCORRECT

D) A decrease in the demand for asphalt. -  we have no clue what demand of asphalt has to do with oil burners. this is verbal section in gmat not a physics exam in a college. INCORRECT.

E) A steady increase in the price of oil beginning soon after the new burner is installed
- Although the new burner is more efficient, if the price of oil goes up theoretically, this could diminish the savings. The understood "savings" you get from using Hotco relies on the assumption that you are paying the same (or less) for oil!

Ivan91 · Answer

How the hell to answer this when I have no idea what oil burner is and what the whole passage talks about...

MzJavert · Answer

Hotco oil burners , designed to be used in asphalt plants , are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the  cost savings  between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years.  On installation, the plant will make an estimated payment, which will be adjusted after two years to equal the actual cost savings.

Hotco oil burners --the product being sold
 Asphalt Plants --The industry the product being sold is aimed at. Asphalt being the product this industry produces.
 Cost savings  of price paid for oil, used by the oil burner, will be the cost of the Hotco oil burner. Range is the two years prior to installation of the Hotco Oil Burner and the two years following the installation of the Hotco Oil Burner.

Thus the price of oil is critical to the cost savings and the price paid for the Hotco Oil Burner.

kelvinp · Answer

Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above? 
  Summary : Hotco pricing plan is Price of oil * oil used (In older plants) - Price of oil * oil used (in Hotco's plants)

A) Another manufacturer’s introduction to the market of a similarly efficient burner
 Effect on Hotco business = yes
Effect on Hotco plans to profit from its efficient plants = No

B) The Clifton Asphalt plant’s need for more than one new burner
 If the extra burner replaces another old plant = more money for Hotco
If the extra burner replaces no another plant = more money for Hotco

C) Very poor efficiency in the Clifton Asphalt plant’s old burner
 As per summary equation above, this makes more money for Hotco (Greater previous cost)

D) A decrease in the demand for asphalt
 As per summary equation above, this makes more money for Hotco (Lower current cost)

E) A steady increase in the price of oil beginning soon after the new burner is installed
 As per summary equation above, this could make the equation become negative, i.e. Hotco lose money in this pricing plan. This is the only answer that shows disadvantage of the plan. Answer is therefore (E)

BrainLab · Answer

Got traped by D, as I've only 40 sec... One should not rush such questions. It's actually not a very difficult one.
So, Hotco are more efficient than standard Burners. But the clue is here that Hotco and Standard Burner   BOTH   use Oil. 
I've rushed this one and thought that Hotco uses alternative fuel....

A) Another manufacturer’s introduction to the market of a similarly efficient burner - irrelevant
B) The Clifton Asphalt plant’s need for more than one new burner - strengthens... 
C) Very poor efficiency in the Clifton Asphalt plant’s old burner - strengthens....

So, the last two are interesting:

D) A decrease in the demand for asphalt -      So, if the demand for asphalt decreases, the amount of oil used by Clifton to manufacture asphalt would likely decrease. If the amount of oil decreases, Clifton’s cost savings on oil would be more than they had been for the previous two years. In this case, it would be an advantage for Hotco, not a disadvantage. 
E) A steady increase in the price of oil beginning soon after the new burner is installed ->  CORRECT. this one has been explained by others, so I would not restate them

torreadortorment · Answer

Wanted to explain choice D for those not familiar. General business equation = Revenue - Costs = Profits.

The premise states that the overall amount to be paid is the difference in costs, that is, difference between costs prior to the installation and costs after the installation.

An increase in demand for asphalt will increase revenue and has nothing to do with costs.

mdabra · Answer

The gap of saving will decrease if the price of oil increases. For example, let suppose the initial cost of oil expenditure was $100 and because of great efficiency of the new burner the cost has reduced to $70, so the saving would be $30. But what if the crude oil price rises to twice? then there will be no saving.

hope you liked the clarification. #Kudos

LakerFan24 · Answer

i feel so stupid...read the q-stem incorrectly. there's a lot to digest here.

Hotco oil burners, designed to be used in asphalt plants, are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the cost savings between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years. On installation, the plant will make an estimated payment, which will be adjusted after two years to equal the actual cost savings.

TRANSLATED: HOTCO'S REVENUE = HOW MUCH CLIFTON PAID FOR OIL USING OLD BURNER (LAST 2 YEARS) - HOW MUCH CLIFTON WILL PAY FOR OIL (NEXT 2 YEARS)
> What would be ADVANTAGEOUS for Hotco? <-- Strengthen: If Clifton paid a LOT more for oil using the old burner AND/OR if Clifton is saving a LOT using the new Hotco oil burner
* ON THE OTHER HAND, WE WANT TO WEAKEN.

Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above?

A) Another manufacturer’s introduction to the market of a similarly efficient burner
- out of scope
B) The Clifton Asphalt plant’s need for more than one new burner
- out of scope too
C) Very poor efficiency in the Clifton Asphalt plant’s old burner
- OPPOSITE! Poor efficiency in old burner means higher revenue for Hotco! I initially went for this when I misread the question as "advantage" instead of "disadvantage"
D) A decrease in the demand for asphalt
- out of scope. concerned with pricing of oil, not asphalt
E) A steady increase in the price of oil beginning soon after the new burner is installed
- Although the new burner is more efficient, if the price of oil goes up theoretically, this could diminish the savings. The understood "savings" you get from using Hotco relies on the assumption that you are paying the same (or less) for oil!

Kudos please if you find this helpful

smmunna · Answer

Option(E) is correct

Option A : The burner is already installed, so a competitor is not a problem.

Option B : The plant's need for multiple burners should bean opportunity for Hotco, nota disadvantage.

Option C : If the old burner was very inefficient, the new burner should save a great deal of money that would ultimately go to Hotco.

Option D : If demand decreases, less oilwould need to be purchased, and Hotco would get more money.

Option E : Correct. This statement properly identifies a factor that would constitute a disadvantage for the plan since the payment for the burner is based on savings in oil purchases, any increases in the price of oil will decrease savings and thus decrease payments to Hotco.

mba757 · Answer

Hi experts!

Although E makes sense, I originally chose B, and I still can't seem to definitively rule it out. Within B, if it is true that CA plant needs more than one new burner, but only uses the one that is sold to it, what if it overuses it, driving up the cost? It could potentially void the benefits that were made with the more efficient system. Is this logic flawed?  MartyTargetTestPrep   GMATNinja   egmat

warrior1991 · Answer

You are assuming that it will only use one burner. Based upon your assumption you come to a conclusion that it will drive up the cost.

What if CA needs 2 burner and used both of them.In this case, old 2 burners will be replaced by these 2 burners and hence will be beneficial for hotco.

In option E , however the talking point is price. Here on top of the option given, you are not assuming anything .

Hence E is the correct answer.

Mraax · Answer

Hotco will get = amount paid for oil in last 2 years - amount paid for oil in next 2 years
Hence E

Hotco oil burners, designed to be used in asphalt plants, are so effic

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Hotco oil burners, designed to be used in asphalt plants, are so effic

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