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555-605 (Medium)|   Business|   Long Passage|                                    
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woohoo921
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Manufacturers have to do more than build large manufacturing 17 Jun 2022, 17:51
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GMATNinja
Push2808
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!
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!
Show more

GMATNinja

Thank you for this helpful explanation. To clarify, on #532 (the primary purpose of this passage is to), is Choice C incorrect because essentially the passage is saying it is not enough just to build large plants ("manufacturers have to do more than build large manufacturing plants"), and then discusses why intangible capital is important?

So, the author does not think that there is a lack of investment but rather that there needs to be a focus on intangible capital? Thank you for all of your time and help.
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Manufacturers have to do more than build large manufacturing 21 Jun 2022, 08:44
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Question 5


woohoo921
GMATNinja
Push2808
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!
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!

GMATNinja

Thank you for this helpful explanation. To clarify, on #532 (the primary purpose of this passage is to), is Choice C incorrect because essentially the passage is saying it is not enough just to build large plants ("manufacturers have to do more than build large manufacturing plants"), and then discusses why intangible capital is important?

So, the author does not think that there is a lack of investment but rather that there needs to be a focus on intangible capital? Thank you for all of your time and help.
Show more
Keeping the purpose of each paragraph in mind, let's consider (C):

Quote:
5. The primary purpose of the passage is to

C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
Show more
Recall that in the first paragraph, the author argues that economies of scale require not only large capacity, but steady throughput, which itself require intangible capital.

Based on this, we could probably infer that IF a large manufacturing facility failed to invest in both tangible and intangible capital, it wouldn't achieve economy of scale. But notice that the author never claims that facilities "often fail" for these reasons. Maybe facilities only RARELY fail because of inadequate investments in tangible and intangible capital? Or maybe they fail specifically because they don't invest enough in intangible capital, whereas their investment in tangible capital is just fine? Or maybe the reason facilities "often fail" has nothing to do with economies of scale?

Since the author never addresses these questions, we really can't say. So the author's main purpose can't be to argue that facilities "often fail" because of some particular cause. For that reason, (C) is incorrect.

I hope that helps!
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Manufacturers have to do more than build large manufacturing 11 Apr 2023, 05:48
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dear GMATNinjaTwo, VeritasKarishma, MartyTargetTestPrep, AndrewN,VeritasPrepBrian,GMATRockstar
KarishmaB

avigutman, AndrewN,MartyTargetTestPrep ,

would you please clarify the C of Q1?
Quote:

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
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at minimum efficient scale
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials
Show more

I haven't gotten how can I infer the first operate its manufacturing plants at minimum efficient scale, the passage just says
Quote:
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
Show more
,
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
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Manufacturers have to do more than build large manufacturing 11 May 2023, 12:44
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Question 1



zoezhuyan
dear GMATNinjaTwo, VeritasKarishma, MartyTargetTestPrep, AndrewN,VeritasPrepBrian,GMATRockstar

KarishmaB

avigutman, AndrewN,MartyTargetTestPrep ,

would you please clarify the C of Q1?

Quote:


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

B. make every effort to keep fixed and sunk costs as low as possible

C. be one of the first to operate its manufacturing plants at minimum efficient scale

D. produce goods of higher quality than those produced by direct competitors

E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

I haven't gotten how can I infer the first operate its manufacturing plants at minimum efficient scale, the passage just says

Quote:
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
,

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
Show more
Question 1 asks us what the passage "suggests." This means that we're going to have to connect the dots, instead of looking for something that's stated outright in the text.

You've highlighted the correct portion of the passage: to dominate an industry, firms must be "the first to exploit the full potential of [technologically sophisticated/optimally sized] plants."

What does the author mean by "exploit the full potential" of a plant? For that, you have to go back to the first paragraph. The author tells us that it's not enough to build a big plant: to exploit the full potential of a plant is to achieve “minimum efficient scale” by optimizing throughput. We learn at the end of the first paragraph that optimizing throughput relies on both tangible and intangible capital.

So, the passage suggests that to have a competitive advantage, firms must "be one of the first to operate its manufacturing plants at minimum efficient scale."

(C) is the correct answer to question 1.

I hope that helps!
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Manufacturers have to do more than build large manufacturing 25 Jan 2024, 23:31
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Hi I have a question regarding answer E for the 2nd question.

According to the passage ………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.

I don’t quit get the logic between the two sentence before and after the word ‘Consequently’

Could anyone explain? If fixed and sunken costs are not affected by fluctuations in a manufacturing plant’s throughput, they are affected by what?
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Manufacturers have to do more than build large manufacturing Updated on: 21 Mar 2024, 10:41
Originally posted by GMATNinja on 21 Mar 2024, 10:14.
Last edited by GMATNinjaTwo on 21 Mar 2024, 10:41, edited 1 time in total.
edited explanation
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Lizshadehdg
Hi I have a question regarding answer E for the 2nd question.

According to the passage ………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.

I don’t quit get the logic between the two sentence before and after the word ‘Consequently’

Could anyone explain? If fixed and sunken costs are not affected by fluctuations in a manufacturing plant’s throughput, they are affected by what?
Show more

The passage doesn't go into detail about what affects fixed/sunk costs. For sunk costs, it would be things like the design of the plant, cost of building materials and construction labor, etc. For fixed costs, it might be things like cost of rent, property taxes, utilities, insurance, etc.

Regardless, all you really need to know is that fixed and sunk costs, unlike variable costs, are NOT affected by levels of production or sales--they remain unchanged regardless of whether the plant makes 2 units per day or 2,000 units per day.

As a result, when fixed costs make up a significant chunk of a plant's expenses, profits are more sensitive to changes in production--that's because the plant needs to generate a certain amount of revenue just to cover the fixed expenses...

  • Say for example, a plant needs to sell 5,000 units per month just to cover the fixed costs. Normally, they sell 6,000 units per month and make a handsome profit from the "extra" 1,000 units. But if production drops by 20% (1,200 units) because of, say, a supply chain issue, the plant is suddenly operating at a loss--the “unit costs rise sharply“ as production drops, because the fixed costs are spread over a smaller number of units.
  • In contrast, if fixed costs didn't exist and all costs were variable, a 20% drop in production would simply mean a 20% drop in profit--which isn't a good thing, but it beats operating at a loss. And because there are no fixed costs to spread across each unit sold, the cost per unit of output would always be at the "minimum" (increasing or decreasing production wouldn't change the cost PER unit of output).

If fixed and sunk costs were insignificant (or were, despite their names, somehow variable), fluctuations in production wouldn't have much of an impact on cost per unit of output. But fixed and sunk costs are real (cost to build the plant, pay the bills, etc.)... and because fixed/sunk costs are NOT variable, fluctuations in production WOULD have a significant impact on cost per unit of output--so how well a plant realizes economies of scale (i.e. minimizes cost per unit of output) depends greatly on how well it avoids or minimizes production declines--and that requires intangible capital (i.e. knowledge, skills, experience, and teamwork).

The part in bold is one way to summarize/paraphrase the sentence that you're asking about. To be fair, that sentence (and the use of "consequently") is awfully confusing. So rather than worry too much about mechanics, focus on the takeaway: when a plant has significant fixed costs, it needs to invest in intangible capital to minimize production delays (i.e. to maintain a steady "throughput")--otherwise profits can disappear quickly.

Hope that helps!­
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