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# Hotco oil burners, designed to be used in asphalt plants,

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Hotco oil burners, designed to be used in asphalt plants, [#permalink]

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13 May 2010, 12:04
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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.

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

For some reason I can't understand this. Any help will be most appreciated.
[Reveal] Spoiler: OA
If you have any questions
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13 May 2010, 13:19
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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. Intern Joined: 16 Jun 2012 Posts: 10 Followers: 0 Kudos [?]: 11 [3] , given: 7 Re: Hotco oil burners, designed to be used in asphalt plants, [#permalink] ### Show Tags 06 May 2013, 03:02 3 This post received KUDOS 1 This post was BOOKMARKED mun23 wrote: run4run wrote: 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. 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 I am not understanding the content of the argument.Need every answer choice`s explanation 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- If the price of oil increases, the company will have to pay more for its oil in the coming 2 yrs. so the difference in price will reduce and HETCO will receive less in return. - CORRECT. Last edited by myselfhari on 06 May 2013, 13:39, edited 1 time in total. Intern Joined: 25 Dec 2006 Posts: 9 Followers: 0 Kudos [?]: 3 [2] , given: 2 Re: Difficult CR OG [#permalink] ### Show Tags 03 Nov 2010, 21:01 2 This post received KUDOS 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.. Manager Joined: 22 Apr 2013 Posts: 88 Followers: 1 Kudos [?]: 34 [2] , given: 95 Re: Hotco oil burners, designed to be used in asphalt plants, [#permalink] ### Show Tags 06 May 2013, 20:40 2 This post received KUDOS 1 This post was BOOKMARKED Ivan91 wrote: How the hell to answer this when I have no idea what oil burner is and what the whole passage talks about... Hotco oil burners, designed to be used inasphalt 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 actuallypaid 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. _________________ I do not beg for kudos. Intern Joined: 08 Nov 2009 Posts: 44 Location: New York, NY Schools: Columbia, NYU, Wharton, UCLA, Berkeley WE 1: 2 Yrs mgmt consulting WE 2: 2 yrs m&a Followers: 0 Kudos [?]: 10 [1] , given: 1 Re: Difficult CR OG [#permalink] ### Show Tags 14 May 2010, 09:51 1 This post received KUDOS 1 This post was BOOKMARKED 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? Intern Joined: 02 Jul 2015 Posts: 38 WE: Investment Banking (Investment Banking) Followers: 1 Kudos [?]: 3 [1] , given: 1 Re: Hotco oil burners, designed to be used in asphalt plants, [#permalink] ### Show Tags 06 Jan 2016, 12:31 1 This post received KUDOS 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. Intern Joined: 07 Aug 2015 Posts: 11 Concentration: Marketing, General Management Followers: 1 Kudos [?]: 7 [1] , given: 58 Re: Hotco oil burners, designed to be used in asphalt plants, [#permalink] ### Show Tags 04 Apr 2016, 13:55 1 This post received KUDOS run4run wrote: 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. 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 For some reason I can't understand this. Any help will be most appreciated. 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
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13 May 2010, 15:16
Yep. Your logic is right. Even if the burner is much more efficient than the old one, if the price of oil goes through the roof, the cost savings could be nil.
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13 May 2010, 16:02
this is a hard one... intially i thought its D but cost of oil going up will reduce the amount paid to Hotco.... assuming same amouint is used.
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15 May 2010, 03:54
can somebody explain - why D is not right?
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15 May 2010, 17:40
Yup the OA is E
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03 Nov 2010, 19:31
I just went over this problem and Chose D as well. I was stuck between D and E. Instinct took me to E first, but ultimately I thought that a D would also be a strong disadvantage is there was no asphalt production to claim the use of the oil...
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04 Nov 2010, 13:20
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.
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06 Nov 2010, 11:12
maybe A ???? or not..........
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07 Nov 2010, 09:44
fell for D
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12 Apr 2011, 08:03
What kind of stimulus is it ? its first sentence is so long I was surely not able understand while doing it in timed practice.
Please check the sentence for grammatical errors
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12 Apr 2011, 08:07
After reading it twice I think it is E
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26 Apr 2011, 11:42
has to be E . and the explanation given above is accurate.

suppose the price for oil goes up so much that same amount of work costs more with hotco at new oil price than it used to cost with old burner at old oil prices.

then hotco will in fact have to pay money to the asphalt company according to the agreement,
as cost savings will be negative
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26 Apr 2011, 18:51
Straight E.
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Re: Difficult CR OG   [#permalink] 26 Apr 2011, 18:51

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