Manufacturers have to do more than build large manufacturing

Create process map first:

Paragraph 1: manufacturers need more than big plant to reach EoC - steady output. Intangible assets are important too.

Paragraph 2: how to invest in intangible assets. Exploiting full potential of big plants makes it harder for late moves to compete.

And then look at all answers:

1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size refer to process map - the passage emphasizes just building big plants is not enough
B. make every effort to keep fixed and sunk costs as low as possible refer to process map - if companies don't have "steady output" this is not gonna work
C. be one of the first to operate its manufacturing plants at minimum efficient scale operational excellence is the suggestion, correct answer
D. produce goods of higher quality than those produced by direct competitors this helps in reality, but "quality" is not mentioned here as a success factor
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials this menations "steady flow" but just stockpiling is not enough and not suggested by author


2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated. whether is underestimated is not mentioned
B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits. you need "steady output" to realize profits
C. They are the primary factor that determines whether a manufacturer will realize economies of scale. they are factors but not "primary", be careful with extreme words.
D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors. bench-marking is not mentioned
E. They are not affected by fluctuations in a manufacturing plant’s throughput. correct answer, refer to "A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines"


3. In the context of the passage as a whole, the second paragraph serves primarily to
if you understand the tone (supporting) of 2nd paragraph, you can eliminate 4 incorrect answers very quickly
A. provide an example to support the argument presented in the first paragraph correct, the first paragraph mentioned "intangible" asset is very important, and the whole 2nd paragraph provides an example to test for that
B. evaluate various strategies discussed in the first paragraph there is no various strategies being discussed - and author didn't evaluate anything. In order to "evaluate" you need present both supporting examples and counter examples. The 2nd paragraph is just supporting
C. introduce evidence that undermines the argument presented in the first paragraph opposite direction "undermine"
D. anticipate possible objections to the argument presented in the first paragraph not possible objection is provided
E. demonstrate the potential dangers of a commonly used strategy no potential dangers are posed


4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

A. a mistake in judgment regarding the selection of a wholesaler coincides with "inadequate supplies of raw materials"
B. a breakdown in the factory's machinery coincides with "problems on the factory floor"
C. a labor dispute on the factory floor coincides with "problems on the factory floor"
D. an increase in the cost per unit of output this is the result not the cause, the questions asks for a cause. And the increase in cost per unit produced doesn't necessarily mean throughput rate is lower
E. a drop in the efficiency of the sales network coincides with "inefficient sales networks"


5. The primary purpose of the passage is to
main idea question - as long as you get the point of EoC is achieved by both big scale and operation efficiency, you are fine here
A. point out the importance of intangible capital for realizing economies of scale in manufacturing correct answer - author highlights the importance of operation excellence which contributed mostly by intangible capital
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities this is not enough any more
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital this might be true, but not the main point. This might just be an example to support main idea
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early "building big plants is not enough"
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale this is true, but most importantly author wants to highlight "what's more important". If the passage stops after proving "building big plants is not enough" and didn't open the later session to discuss "operational excellence", this might be the correct answer.

VeritasKarishma GMATNinja

please explain question 3

Hi saby1410,

Please refer this for Q3 : https://gmatclub.com/forum/manufacturer ... l#p1843326

Let me know if you still have doubts.

Thanks.

Here are my thoughts. Please let me know how I can improve.

1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size
Incorrect. This choice starts off OK, but by the tail end we see that it loses the focus of what the passage is about. In fact, the passage states very clearly in the second sentence of the second parapgraph that this is not the case.
B. make every effort to keep fixed and sunk costs as low as possible
Incorrect. This is certainly plausible in real life (and true mind you), but the decisive advantage according to this passage is not conferred by the management of costs.
C. be one of the first to operate its manufacturing plants at minimum efficient scale
Correct. Minimum efficient scale consists of achieving realized AND tangible economies of scale, the former is what exploiting the firm’s full potential is all about.
D. produce goods of higher quality than those produced by direct competitors
Quality has not entered the discussion at all
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials
This choice is interesting, it’s technically true and could be an answer to this question because achieving minimum efficient scale does require the steady flow of raw materials. However, this is not the only essential ingredient since good throughput requires more than this. C is the better answer.

2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated. X

B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.

No. We’ve seen from the passage that profits are determined by a number of things (cost sure), but certainly throughput success. In fact, the rest of the sentence tells us why we wouldn’t realize significant profits from keeping costs low alone.

C. They are the primary factor that determines whether a manufacturer will realize economies of scale. X

No. Throughput and build of plants are (the emphasis in this passage is moreso on the former).

D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors. X

There’s no mention of costs with respect to competitors. Out.

E. They are not affected by fluctuations in a manufacturing plant’s throughput.

Correct (the profit is affected by the fluctuations in throughput, but the fixed and sunk costs are what they are).

3. In the context of the passage as a whole, the second paragraph serves primarily to

A. provide an example to support the argument presented in the first paragraph Correct
B. evaluate various strategies discussed in the first paragraph
No. There were no strategies discussed explicitly in the first paragraph, albeit this could be tempting because the achievement of economies of scale does require the implementation of strategies (although this is beyond anything that we are presented with)
C. introduce evidence that undermines the argument presented in the first paragraph
Incorrect. The first and second paragraphs agree with each other.
D. anticipate possible objections to the argument presented in the first paragraph
No.
E. demonstrate the potential dangers of a commonly used strategy
I suppose if anything the point to be made is that this strategy is not commonly used. Hence, that’s why some firms enjoy market dominance over others. This choice is incorrect.

4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

A. a mistake in judgment regarding the selection of a wholesaler
B. a breakdown in the factory's machinery
C. a labor dispute on the factory floor
D. an increase in the cost per unit of output Correct (this choice is all about directionality; that is, throughput > cost per unit of output, not cost per unit > throughput)
E. a drop in the efficiency of the sales network

5. The primary purpose of the passage is to

A. point out the importance of intangible capital for realizing economies of scale in manufacturing Correct
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities X
Misses the point.
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
Incorrect – we don’t know about the success or lack thereof of large facilities. If anything, we can actually infer that LARGE facilities often DO NOT fail because they’ve done both. That’s why they are so large to begin with.
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early X
Misses the point
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale
Misses the point entirely – nowhere is this mentioned.
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Notes:

Ecom of Scale (EOS) >> Large Plants
Capacity →MES←Throughput; thru(Input+Output)↓Cu(Cost per unit)↑ Profit→0
Prod ↓→Fixed & Sunk $ do not dec
∴ EOS=tangible+Intangible

Further: Imp of Intangible Capital.
Ex: full potential → success, again challenger must work on both Tang & Intang

1.
"The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants." therefore A
Quality and Stockpile is not talked anywhere so D E

Now between B & C. Keeping Fixed Cost and sunk cost is certainly a good idea but it would not necessarily provide decisive advantage over competitors, which might be working on the the same too also fixed cost and sunk cost do not decrease beyond a certain level as optimum capital investment is necessary; However, if manufacturer is the first to operate at Minimum effective Scale (MES), the manufacturer would certainly have clear advantage over competitors, as the market becomes hard to enter.
Correct: C

2.
"A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks"
Correct: E

3.
First paragraph tells us that not only tangible but also intangible capital is necessary to realize EOS.
Second para talks further about intangible capital and how the firm first to achieve both Optimal plant size and full potential dominates a market and market becomes hard to enter.
Correct: A

4.
" If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks "
Steady Through put-> MES--> unit cost--> minimum
Its not the other way round i.e. increase in unit cost not necessarily affect MES.
Correct: D

5.
BD
C : THe passage does not talk about why large manufacturer fail, rather it emphasize on importance of investment in intangible capital too along with tangible.
E Both tangible and intangible are important.
Correct A

dear AndrewN,

would you please clarify the C of Q1?


I haven't gotten how can I infer the first operate its manufacturing plants at minimum efficient scale, the passage just says
,
my interpretation is the first one that shows the intangible capital plants. all the second passage talks about the importance of intangible capital plants.

I have no idea what I missed.

thanks in advance

Hi GMATNinja

Can you please help me understand how to go about this type of passage. It took me 10 minutes to understand the passage.

Will highly appreciate your response!

Dissecting the passage

Manufacturers have to do more than build large manufacturing plants to realize economies of scale.
manufacturer need to go extra mile to realize economies of scale - realizing economies of scale is main concern here

It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market.
Defining cost per unit relation

However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear.
Defining throughput and its relation to EOS (economies of scale).

A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

reason for EOS is intangible capital/ assets.

　　The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.

example for importance of intangible assets in EOS.

there are two thing that author mainly discuss 1) EOS and 2) intangible assets are important for EOS.
therefore Answer to Q5 : D

there are two mainly things Author is discussing 1. Economies of scale and 2) Importance of Intangible assets/captial. the only Option A is having both of them

The best approach to RC is to have a consistent method which you can apply to any passage. As you finish each paragraph, pause to ask yourself the following questions: 1) What was the author's purpose? 2) How does this paragraph connect to the previous paragraph? Check out our RC Guide for more on this approach.

Also, in case it helps, here's how we'd break down the passage using our method:

Paragraph 1

• The author tells us what is necessary for economies of scale: not only large capacity, but also steady throughput.
• The author then provides details about steady throughput: particularly, it depends on intangible capital.

Paragraph 2

• The author explains why intangible capital is important

Overall, the second paragraph develops the main idea from the first paragraph –- namely, that steady throughput/intangible capital is essential to achieve economies of scale.

I hope that helps a bit!
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1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

(You are being asked to infer WHAT a manufacturer in a capital-intensive industry must do in order to gain an advantage over competitors. Remember, you can only infer a piece of information from the content provided in the passage.

A. be the first in the industry to build production facilities of theoretically optimal size This is a contradiction. The second line of the second paragraph says that such industries are not dominated by firms that build facilities of optimal size.

B. make every effort to keep fixed and sunk costs as low as possible The only reference to fixed costs and sunk costs is in the first para where it has been mentioned that these costs don’t decrease when production declines. There’s no reference to these costs in connection to capital-intensive industries.

C. be one of the first to operate its manufacturing plants at minimum efficient scale The fourth line of the 2nd paragraph says that the company that exploits the full potential of their manufacturing plant will have a decisive advantage. This can be inferred as per the definition of “minimum efficient scale” in the first paragraph.

D. produce goods of higher quality than those produced by direct competitors The quality of the product cannot be inferred.

E. stockpile raw materials at production sites in order to ensure a steady flow of such materials Nothing can be inferred about stockpile of raw materials.


2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

(You are being asked to make an inference about a manufacturer's fixed and sunk costs. Remember, you can only infer a piece of information from the content provided in the passage.)

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated. We cannot infer if it has been underestimated or not.

B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits. All the passage says is that these costs do not decrease when production declines. From this we cannot necessarily infer that keeping these cost low will necessarily lead to a profit.

C. They are the primary factor that determines whether a manufacturer will realize economies of scale. These costs may be one of the factors but we don’t know if these are the primary factors.

D. They should be on a par with the fixed and sunk costs of the manufacturer's competitors. We do not know anything about the competitors.

E. They are not affected by fluctuations in a manufacturing plant's throughput. This can be inferred. In the sentence about the manufacturer’s fixed costs and sunk costs, various fluctuations in the flow of the materials through a manufacturing plant have been mentioned. This sentence tells us that fixed and sunk costs do not decrease even if there are any fluctuation.


3. In the context of the passage as a whole, the second paragraph serves primarily to

(You are being asked to understand the flow of the content and identify the function of the second paragraph.)

A. provide an example to support the argument presented in the first paragraph The last line of the first paragraph says that realized economies of scale are dependent on intangible capital. The second paragraph goes one to give an example to support this.

B. evaluate various strategies discussed in the first paragraph Strategies discussed in the first paragraph have not been discussed or evaluated

C. introduce evidence that undermines the argument presented in the first paragraph No evidence has been presented that undermines the argument.

D. anticipate possible objections to the argument presented in the first paragraph No objections have been anticipated

E. demonstrate the potential dangers of a commonly used strategy No dangers, potential or otherwise, have been anticipated


4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

(You are being asked to infer the one thing that will not adversely affect the manufacturer's throughput.)

A. a mistake in judgment regarding the selection of a wholesaler The passage mentions that production could decline due to inadequate supplies of raw material. From this we can infer that if choosing the wrong wholesaler could adversely affect the throughput.

B. a breakdown in the factory's machinery The passage mentions that production could decline due to problems on the factory floor. A breakdown in the factory's machinery is one such problem. This means that breakdown in the factory's machinery could adversely affect the throughput.

C. a labor dispute on the factory floor The passage mentions that production could decline due to problems on the factory floor. A labor dispute on the factory floor is one such problem. This means that a labor dispute on the factory floor could adversely affect the throughput.

D. an increase in the cost per unit of output The passage says that “If throughput falls below a critical point, unit costs rise sharply and profits disappear.” If throughput falls a great deal, then unit costs will go up sharply, yes. But if unit costs go up, that does not necessarily mean throughput will fall; it could stay the same or increase. This cannot be inferred.

E. a drop in the efficiency of the sales network The passage mentions that production could decline due to inefficient sales networks. From this we can infer that a drop in the efficiency of the sales network could adversely affect the throughput.


5. The primary purpose of the passage is to

(You are being asked why the author has written this essay. What was the intention? Remember, the answer cannot contradict what has been mentioned in the passage. Nor can it refer to something that has not been addressed in the passage. The answer also cannot be referring to a small aspect of what was mentioned in the passage; it needs to be more holistic.)

A. point out the importance of intangible capital for realizing economies of scale in manufacturing The author has used this passage to point out the importance of intangible capital for realizing economies of scale in manufacturing

B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities The only reference made to gaining a competitive advantage is the mention of being the first to exploit the full potential of the manufacturing plants. So this can’t be the primary purpose.

C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital The point made is that potential economies of sale may be based on tangible capital, but finally, realized economies of sale depend on intangible capital. There’s no talk of inadequate investment.

D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early The passage says that the ones that dominate are the ones that are the first to exploit the potential. So this can’t be the primary purpose.

E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale The author has mentioned that the industry that will gain advantage is not the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. But this doesn’t mean that large manufacturing plants usually do not help manufacturers achieve economies of scale. So this can’t be the primary purpose.

- Nitha Jay
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Really do not understand Q5 Choice E.

MartyTargetTestPrep pls answer it the TTP way. Really struggling with E. I think the whole passage is an answer to the "why" in E. I am not sure why passage 2 will not fit into this "why". Moreover, the passage is saying why the large plants wont lead to economies of scale and the reason is their lack of focus on intangible. I rejected A and was confused b/w C and E before choosing E

Is throughput indicative of tangible or intangile benefit? Is the passage advocating for intangible benefit or throughput

Hi ag153.

Question 5 choice (E) is a trap choice that SEEMS to be supported by the passage but actually goes in a direction different from what the passage says.

To see why (E) is not correct, we can carefully compare what the passage says with what (E) says.

The first sentence of the passage says the following:

"Manufacturers have to do more than build large manufacturing plants to realize economies of scale."

Then, continuing to read the passage, we see that the remainder of the passage to a large degree expands on what the first sentence says and adds the idea that, for realizing economies of scale, something else is needed in addition to large manufacturing plants. That something else is intangible capital.

So, what is the point of the passage? It's that, while manufacturing plants are necessary for realizing economies of scale, they are not sufficient for realizing economies of scale. So, "Manufacturers have to do more": they have to invest in intangible capital.

Now, let's look at question 5 choice (E).

(E) explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

Notice that what choice (E) says is quite different from what the passage says. Whereas the point of the passage is that manufacturing plants ARE NECESSARY BUT NOT SUFFICIENT for realizing economies of scale, choice (E) is saying that the point of the passage is that manufacturing plants DON"T HELP AT ALL with realizing economies of scale. So, whereas the direction of what the passage says is that the plants have a role in achieving economies of scale, choice (E) is saying that the point is that the plants have no such role.

Thus, choice (E) is clearly incorrect.

Now, let's consider choice (A).

(A) point out the importance of intangible capital for realizing economies of scale in manufacturing

While there's more we could do to support choice (A), what we have discussed here indicates that choice (A) accurately describes the primary purpose of the passage.

The correct answer is (A).
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