gurpreet07 wrote:
In the country of Veltria, the past two years' broad economic recession has included a business downturn in the clothing trade, where sales are down by about 7 percent as compared to two years ago. Clothing wholesalers have found, however, that the proportion of credit extended to retailers that was paid off on time fell sharply in the first year of the recession but returned to its prerecession level in the second year.
Which of the following, if true, most helps to explain the change between the first and the second year of the recession in the proportion of credit not paid off on time?
(A) The total amount of credit extended to retailers by clothing wholesalers increased between the first year of the recession and the second year.
(B) Between the first and second years of the recession, clothing retailers in Veltria saw many of their costs, rent and utilities in particular, increase.
(C) Of the considerable number of clothing retailers in Veltria who were having financial difficulties before the start of the recession, virtually all were forced to go out of business during its first year.
(D) Clothing retailers in Veltria attempted to stimulate sales in the second year of the recession by discounting merchandise.
(E) Relatively recession-proof segments of the clothing trade, such as work clothes, did not suffer any decrease in sales during the first year of the recession.
- There has been recession in which clothing sales are down by 7% in the last 2 years.
- But, the proportion of credit extended to retailers that was paid off on time fell sharply in the first year of the recession but returned to its prerecession level in the second year.
What is the meaning of the second sentence?
Wholesalers extend credit to retailers i.e. they supply material to retailers but say, have a 90 day credit cycle. After 90 days, the retailers need to pay for the goods given to them by wholesalers. The idea is that the retailers will get time to sell off at least part of the wares and hence get some working capital on hand to pay to the wholesalers. The second sentence tells us that the proportion of credit extended to retailers which was paid off on time (say within 90 days) decreased sharply in first year (presumably because sales of retailers were hit and they did not have enough capital on hand to pay the wholesalers on time) but, the proportion paid back returned to normal levels in year 2 of the recession. This is somewhat unexpected, right? Since recession is still there and sales are down by 7%, one might expect that proportion of credit paid back by retailers on time will stay low.
What explains this change from year 1 to year 2?
(A) The total amount of credit extended to retailers by clothing wholesalers increased between the first year of the recession and the second year.
Total amount of credit is irrelevant. We need to compare proportion of credit paid back on time.
(B) Between the first and second years of the recession, clothing retailers in Veltria saw many of their costs, rent and utilities in particular, increase.
If costs increased for retailers, they would find it even harder to pay back to wholesalers on time. Why then did things get normal in year 2?
(C) Of the considerable number of clothing retailers in Veltria who were having financial difficulties before the start of the recession, virtually all were forced to go out of business during its first year.
The retailers facing difficulties (and presumably were unable to pay on time) went out of business in year 1. Hence, only the more stable retailers were left in year 2. This explains why the proportion of pay back on time became normal in year 2.
Correct.
(D) Clothing retailers in Veltria attempted to stimulate sales in the second year of the recession by discounting merchandise.
The sales were down by 7% in year 2. Discounts would have actually led to lower revenue in year 2 and hence it doesn't explain why retailers started paying on time again in year 2.
(E) Relatively recession-proof segments of the clothing trade, such as work clothes, did not suffer any decrease in sales during the first year of the recession.
We are talking about the entire industry, not just a section.
Answer (C)
Thank you for your explanation. It is certainly very helpful. However, I have one small doubt...why is the question saying that the “credit extended to the retailers has decreased” instead of the “credit paid by the retailers”
Also, will the retailer pay for all the goods that was given to him by the wholesaler, or will he only pay for the goods that he managed to sell to the customers ?
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25 Feb 2019, 20:01
