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# In principle, gross margin, the difference between

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In principle, gross margin, the difference between  [#permalink]

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16 Jul 2017, 18:55
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Difficulty:

35% (medium)

Question Stats:

73% (00:56) correct 27% (01:29) wrong based on 77 sessions

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In principle,gross margin,the difference between the customer sales price of the product and the cost to manufacture the product,on a product is directly proportional to the R&D investment the company makes. However,the same does not hold true with Nokia and Apple,who compete in the cell phone market. Nokia spends 3 times on R&D as much as Apple does but earns substantially lower average gross margins on product sales.

A) Nokia spreads the R&D across multiple product lines,whereas Apple sells its products only in one product line,the one with the highest margins.

B) Apple uses more contractors than Nokia does for production.

C) Nokia pays its engineers about the same as Apple does,but provides them with better benefits.

D) Apple sells direct and therefore has lower sales overhead than Nokia does on products.

E) Nokia's CEO's pay is higher than that of Apple's CEO.

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Re: In principle, gross margin, the difference between  [#permalink]

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16 Jul 2017, 19:40
Nokia spends 3 times on R&D as much as Apple does but earns substantially lower average gross margins on product sales.

We have to resolve paradox in the above stmnt

A explains both why the RnD investment is high for nokia and why Apple has high gross margin

B C E out of scope - simply eliminate

D is a trap choice. On comparison A seems to be more solid choice

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Re: In principle, gross margin, the difference between  [#permalink]

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16 Jul 2017, 21:45
sarathgopinath wrote:
In principle,gross margin,the difference between the customer sales price of the product and the cost to manufacture the product,on a product is directly proportional to the R&D investment the company makes. However,the same does not hold true with Nokia and Apple,who compete in the cell phone market. Nokia spends 3 times on R&D as much as Apple does but earns substantially lower average gross margins on product sales.

A)Nokia spreads the R&D across multiple product lines,whereas Apple sells its products only in one product line,the one with the highest margins.
Correct. This choice directly explain why Nokia earns lower gross margin than Apple.

B)Apple uses more contractors than Nokia does for production.
This choice doesn't help to resolve the paradox that why Nokia earns lower gross margins than Apple.

C)Nokia pays its engineers about the same as Apple does,but provides them with better benefits.
This choice still doesn't explain why Nokia earns lower gross margins than Apple.

D)Apple sells direct and therefore has lower sales overhead than Nokia does on products.
This choice is irrelevant to the argument. The argument focuses on R&D Dept only.

E)Nokia's CEO's pay is higher than that of Apple's CEO.
This choice is irrelevant to the argument.
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Re: In principle, gross margin, the difference between  [#permalink]

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17 Jul 2017, 00:51
Imo A
D is a trap choice as we must concentrate what is given in the passage .
Nothing can be concluded from D so A is the answer.
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Re: In principle, gross margin, the difference between  [#permalink]

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17 Jul 2017, 07:23
sarathgopinath wrote:
In principle,gross margin,the difference between the customer sales price of the product and the cost to manufacture the product,on a product is directly proportional to the R&D investment the company makes. However,the same does not hold true with Nokia and Apple,who compete in the cell phone market. Nokia spends 3 times on R&D as much as Apple does but earns substantially lower average gross margins on product sales.

A) Nokia spreads the R&D across multiple product lines,whereas Apple sells its products only in one product line,the one with the highest margins.

B) Apple uses more contractors than Nokia does for production.

C) Nokia pays its engineers about the same as Apple does,but provides them with better benefits.

D) Apple sells direct and therefore has lower sales overhead than Nokia does on products.

E) Nokia's CEO's pay is higher than that of Apple's CEO.

It seems that people are stuck between A and D as the correct choice. I try to differentiate the two options.

A: States that Nokia has higher R&D costs because it has a larger product line and spends the money for research in all the lines, whereas Apple only has a single product and spends all the money allotted to R&D on this one product. This explanation would mean that since Nokia is spending a lot of money on R&D only a small portion of the money is directed towards the Mobile market of Nokia. This small portion falls in line with the cost to margin equation of Nokia and Apple.

D: States that Nokia has higher overhead costs because of which the margins are low. but, what we tend to skip in this is that the gross margin is defined in the question as the difference between the manufacturing cost and the selling price. This definition would mean that any overhead costs will not be considered in calculating the gross profit and even with high overhead costs the gross margin must be true to the initial equation of gross margins and R&D costs.

Please inform if I am thinking it wrong

--== Message from the GMAT Club Team ==--

THERE IS LIKELY A BETTER DISCUSSION OF THIS EXACT QUESTION.
This discussion does not meet community quality standards. It has been retired.

If you would like to discuss this question please re-post it in the respective forum. Thank you!

To review the GMAT Club's Forums Posting Guidelines, please follow these links: Quantitative | Verbal Please note - we may remove posts that do not follow our posting guidelines. Thank you.
Re: In principle, gross margin, the difference between   [#permalink] 17 Jul 2017, 07:23
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