Last year Company X experienced an unexpectedly steep drop in profits.

Official explanation given by Kaplan -

Conclusion: Company X should reduce its workforce by 10% in order to recoup losses.

Evidence: Company X would save money in payroll expenditures if the workforce were smaller.

The objective of company X is to generate enough revenue to offset past losses, and the evidence states that this can be done by cutting the workforce (since cutting the workforce also means lower payroll expenditures). For this to be true, a smaller workforce must be compatible with revenue generation. If it is not, then company X will not generate revenue and will not recoup past losses. The answer must indicate that these two concepts are compatible. Choice (C) does so by stating that reducing the workforce will not result in a decrease in productivity.

(A) and (B) focus on decreased payroll expenditures rather than on a decreased workforce, and thereby ignore the issue of productivity. It is possible that company X will recoup its losses by a decrease in payroll costs, but then lose even more money due to decreased production. Assuming either (A) or (B) does not guarantee that the company will win in the end. With (D), the argument does not address any other pools of money for possible use; it simply asks about the connection between a smaller workforce and the possibility of recouping losses. And (E), past workforce reductions are not relevant here. We are only concerned with the current pool of employees.