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Manufacturers have to do more than build large manufacturing

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Manufacturers have to do more than build large manufacturing [#permalink] New post   Updated on: 31 Oct 2021, 04:35
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The Official Guide for GMAT Review, 13th Edition, 2012

Practice Question
Question No.: RC 37 ~ 41
Page: 382

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

　　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.

Show Spoiler
C

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
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 Spoiler
E

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.
B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.
C. They are the primary factor that determines whether a manufacturer will realize economies of scale.
D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors.
E. They are not affected by fluctuations in a manufacturing plant’s throughput.


Show Spoiler
A

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
B. evaluate various strategies discussed in the first paragraph
C. introduce evidence that undermines the argument presented in the first paragraph
D. anticipate possible objections to the argument presented in the first paragraph
E. demonstrate the potential dangers of a commonly used strategy


Show Spoiler
D

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
E. a drop in the efficiency of the sales network


Show Spoiler
A

5. The primary purpose of the passage is to

A. 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
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale



OG 2019 ID's
RC00121-01
RC00121-02
RC00121-03
RC00121-05
RC00121-07
ShowHide Answer Question #1
Official Answer
C
ShowHide Answer Question #2
Official Answer
E
ShowHide Answer Question #3
Official Answer
A
ShowHide Answer Question #4
Official Answer
D
ShowHide Answer Question #5
Official Answer
A

Originally posted by omidsa on 29 May 2012, 11:37.
Last edited by Sajjad1994 on 31 Oct 2021, 04:35, edited 2 times in total.
Updated complete topic (61).
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   27 Apr 2017, 06:33
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omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. 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. 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. 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.

　　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.
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
E. a drop in the efficiency of the sales network

Show Spoiler
D



OG2017 RC449-453 P 390


TRICKY


Passage: Economies of Scale
Question: Infer LEAST

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

This question is unusual. The word inference points to an Inference question, but the word LEAST turns the question around. Try reading it this way: What does the passage imply could adversely affect throughput? Four of the answers (the wrong ones) are things that could adversely affect throughput. The correct answer is something that would NOT adversely affect throughput (or would be least likely to adversely affect throughput).

Step 2: Find the Support

Throughput is discussed in the first paragraph. Read a couple of sentences to remind yourself about this concept.

“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.”

Step 3: Predict an Answer

Because the four incorrect answers will be in the passage, you may need to work backwards to some extent on this one (from the answer choices to the passage). To start, though, throughput requires careful coordination of the flow of goods (so you can infer that not having this coordination would adversely affect throughput). In addition, throughput requires careful coordination of the flow of input from suppliers and output to wholesalers and consumers. Again, you can infer that not having this coordination would adversely affect throughput.
Check the answers to see what you can cross off so far.

Step 4: Eliminate and Find a Match

You can eliminate answer (A) and possibly (E) via an initial scan based on the predicted answer above. For the other three choices, work backwards: check them against the rest of the paragraph.

(A) Throughput can be adversely affected by issues related to wholesalers. Eliminate this choice.
(B) This choice wasn’t addressed by the first part, so scan lower in the paragraph to find a match. Bingo! Line 21 mentions that production can decline due to problems on the factory floor; a breakdown of machinery is a problem. Eliminate this choice.
(C) This choice wasn’t addressed by the first part, so scan lower in the paragraph to find a match. Bingo! Line 21 mentions that production can decline due to problems on the factory floor; a labor dispute is a problem. Eliminate this choice.
(D) CORRECT. This is so tricky! The passage says that “If throughput falls below a critical point, unit costs rise sharply and profits disappear.” This statement seems to support the idea that unit costs would affect throughput—but be careful about the direction of that relationship. 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. In addition, notice the difference in scope: the passage addresses a sharp increase in costs. The answer mentions only an increase. If the unit cost goes up by a tiny amount, nothing else may be affected in the slightest.
(E) The sales network could be considered part of the company to wholesaler relationship, so eliminate this choice. Alternatively, line 22 states that production can decline due to inefficient sales networks.
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   26 Apr 2017, 07:10
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omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. 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. 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. 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.

　　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.
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
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 Spoiler
C



OG2017 RC449-453 P 390


Passage: Economies of Scale

Question: Infer Advantage

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word suggests in the question stem indicates that this is an Inference question. Specifically, what can you infer regarding what a manufacturer must do in order to gain a decisive advantage?

Step 2: Find the Support

Overall, the correct question should go along with the main idea that it is important to invest in intangible capital, not just tangible capital (in which everyone already invests).

Where does the author talk about competitive advantage? Primarily in paragraph two:

“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.”

It isn’t necessary to be the first to build a plant, but it is important to be one of the first to maximize the full potential of a plant. What is the full potential? It has to do with maximizing economies of scale. From paragraph one:

“ … 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.”

Step 3: Predict an Answer

It’s crucial, then, to be among the first to figure out how to achieve economies of scale (aka, minimum efficient scale). If so, then you may be able to dominate the market.

Step 4: Eliminate and Find a Match

(A) This choice may be tempting because it copies language from the passage exactly, but the underlying message contradicts the passage. The important thing is not necessarily to be the first to build up that plant; rather, it’s important to be among the first to achieve economies of scale.
(B) The first paragraph does mention fixed and sunk costs, but does not do so in the context of competitive advantage in particular.
(C) CORRECT. This choice matches the predicted answer: the first company or companies to achieve economies of scale can dominate the market.
(D) This choice sounds great in the real world (quality must be important, right?) but the passage does not address quality as a factor in gaining competitive advantage.
(E) The first paragraph does discuss the importance of ensuring a steady flow of raw materials, but does not do so in the context of competitive advantage in particular. (And note that a steady flow is not the same thing as stockpiling.)
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   26 Apr 2017, 18:50
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omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. 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. 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. 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.

　　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.
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
B. evaluate various strategies discussed in the first paragraph
C. introduce evidence that undermines the argument presented in the first paragraph
D. anticipate possible objections to the argument presented in the first paragraph
E. demonstrate the potential dangers of a commonly used strategy

Show Spoiler
A



OG2017 RC449-453 P 390


Passage: Economies of Scale
Question: Second Paragraph

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The words second paragraph serves primarily to in the question stem indicate that this is a Paragraph question. What purpose does paragraph 2 serve in the context of the entire passage.

Step 2: Find the Support

On Paragraph questions, your task is two-fold: articulate the main idea or purpose of the specific paragraph and compare that to the overall main idea of the entire passage. Often, the first sentence of two of the specific paragraph will tell you the purpose of that paragraph in the context of the whole passage.

The opening sentence of the second paragraph is as follows:

“The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital‐intensive manufacturing industries.”

Step 3: Predict an Answer

The entire passage is about the idea that intangible capital—not just tangible—is an important part of achieving economies of scale in manufacturing businesses.
The first sentence of the second paragraph indicates that the author has already established (in the previous paragraph) that it is important to invest in intangible capital. Now, in paragraph two, the author is going to provide a particular example that will serve to back up her claim.

Step 4: Eliminate and Find a Match

(A) CORRECT. This matches the predicted answer exactly.
(B) The second paragraph provides a specific example of the overall phenomenon; it does not evaluate various strategies presented earlier.
(C) This choice contradicts the passage. The second paragraph supports the first paragraph.
(D) This choice does not go along with the passage. The second paragraph provides an example in support of the first paragraph; it does not address possible objections.
(E) While the second paragraph does mention a danger for companies entering an already-established market with dominant players in place, this is not the main purpose of the paragraph. Rather, the focus of the paragraph is on the advantages that can be gained if a company does invest in intangible capital.
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   27 Apr 2017, 06:49
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omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. 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. 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. 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.

　　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.
5. The primary purpose of the passage is to

A. 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
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

Show Spoiler
A



OG2017 RC449-453 P 390


Passage: Economies of Scale
Question: Primary Purpose

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The words primary purpose in the question stem indicate that this is a Primary Purpose, or main idea, question.

Step 2: Find the Support & Step 3: Predict an Answer

On main idea questions, your passage map (or your understanding of the passage in general) will provide the information you need to answer the question. Briefly reiterate the simple story to yourself: the author is focused on promoting the idea that economies of scale rely not just on tangible capital but on intangible capital as well.

Step 4: Eliminate and Find a Match

(A) CORRECT. This matches the pre-articulated position: Intangible capital is really important to achieve economies of scale. This choice doesn’t mention tangible capital because the author presents tangible capital as something that is already known or accepted; companies already invest in tangible capital. The main point is the importance of this other aspect that many companies overlook: intangible capital.

(B) This choice misses the main point: building a large facility, in and of itself, is not enough. The author argues that intangible capital must come into play in order to gain a large competitive advantage.

(C) This choice is tricky. The passage does intimate that inadequate investment in intangible capital can harm a company’s chances of success. It does NOT, however, suggest that investment in tangible capital is inadequate.

(D) This choice contradicts the main point: building a large facility, in and of itself, is not enough. The author argues that intangible capital must come into play in order to gain a large competitive advantage.

(E) This choice is tempting. The author does NOT argue that large plants in general do not help achieve economies of scale, only that large plants alone are not enough. The author argues that companies must also invest in intangible factors to help achieve economies of scale. The last paragraph, in fact, outlines how a company with large plants and strong intangibles can dominate a market.
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   26 Apr 2017, 08:06
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omidsa wrote:
Manufacturers have to do more than build large manufacturing plants to realize economies of scale. 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. 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. 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.

　　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.
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.
B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.
C. They are the primary factor that determines whether a manufacturer will realize economies of scale.
D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors.
E. They are not affected by fluctuations in a manufacturing plant’s throughput.

Show Spoiler
E



OG2017 RC449-453 P 390


Passage: Economies of Scale
Question: Infer Costs

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word suggests in the question stem indicate that this is an Inference question. Specifically, what can you infer regarding a manufacturer’s fixed and sunk costs?

Step 2: Find the Support

Fixed and sunk costs were mentioned in paragraph one. In general, when you can find a precise keyword mentioned just once in the passage, start re-reading the sentence before the one in which the keyword appears.

“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.”

Step 3: Predict an Answer

What does that mean? These costs do not decrease even if you have to slow down the assembly line for some reason. That is, you’ve already spent some money to build your plant, and certain other costs are fixed, no matter how much you produce. These fixed and sunk costs are not affected by increases or decreases in actual production.

Step 4: Eliminate and Find a Match

(A) This choice is confusing.  The passage does not address how fixed and sunk costs may be determined by market conditions, however.
(B) This seems like a great real-world answer, but the passage does not claim that low costs of a certain type are very likely to lead to large profits.
(C) The passage does not say that these types of costs in particular are the primary factor responsible for achieving economies of scale. If anything, the passage implies that intangible factors are more important.
(D) While this choice sounds reasonable in the real world, competition is not mentioned in the context of fixed and sunk costs.
(E) CORRECT. This choice matches the predicted answer: a decrease in throughput (aka, production) doesn’t affect fixed and sunk costs. That money either has already been spent or cannot be reduced (for instance, the salaries of senior management!).
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   10 Feb 2020, 16:17
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shabuzen102 wrote:
Hi -
In the bolded part of this sentence:

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.

They used two "as" to denote how things happen simultaneously. When there's one "as", we try to say two things happening at once: "As I go to school, I think about lunch." But when there are two "as" like that, does that mean there are 3 things happening at once "As I go to school, I think about lunch as I look at my phone."

Is that what's happening with that sentence? It just sounds so odd and heavy to me that I'm not sure what's going on. Thanks!

You're on the right track! This sentence explores three things that are interconnected and occur at roughly the same time.

AS "capacity of a manufacturing operation rises," two additional factors change:

  • "costs per unit of output fall"
  • AND "plant size approaches 'minimum efficient scale'"

More importantly, you can glean information about the meaning of a convoluted sentence by considering its role in the context of the passage. In this case, the author begins with an assertion: "Manufacturers have to do more than build large manufacturing plants to realize economies of scale."

Then he/she writes the sentence that is giving you trouble, starting with "It is true that." Broadly speaking, the rest of this sentence discusses the impact of building large manufacturing operations.

And here is the following sentence: "However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained."

From this, is it clear that the purpose of the sentence in question is to admit that building large manufacturing plants is a part of realizing economies of scale. However, the the author's main point in this piece of the passage is that this is not enough -- manufacturers have to do more to fully realize economies of scale.

Understanding why the author includes a particular point, and how that point fits into the context of the passage, can be helpful in understanding a tricky sentence even if the exact wording is difficult to interpret.

I hope that helps!
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   01 Apr 2013, 21:15
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Can any one pls explain me 1st and 5th questions below?
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
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

Here a, b, d gets directly eliminated. I am confused between a and e.

5. The primary purpose of the passage is to
A. 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
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

5th Qn - I am confused between a and e
a - talks about intangible capital importance. Last line of 1st parra says, for potential economies of scale, investment in tangible capital needed and for realized economies of scale, investment in intagible capital needed. So , a becomes part of primary purpose. Pls correct me if i am wrong here.
e - 1st line of 1st para says, manufacturer needs to do more than constructing large sized plants to acheive economies of scale. So, large plans need not necessarily acheive economies of scale. So, why can't e be agreed to?
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   26 May 2013, 09:48
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ernesto wrote:
Can any one pls explain me 1st and 5th questions below?
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
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

Here a, b, d gets directly eliminated. I am confused between a and e.

5. The primary purpose of the passage is to
A. 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
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

5th Qn - I am confused between a and e
a - talks about intangible capital importance. Last line of 1st parra says, for potential economies of scale, investment in tangible capital needed and for realized economies of scale, investment in intagible capital needed. So , a becomes part of primary purpose. Pls correct me if i am wrong here.
e - 1st line of 1st para says, manufacturer needs to do more than constructing large sized plants to acheive economies of scale. So, large plans need not necessarily acheive economies of scale. So, why can't e be agreed to?


The main idea of passage is "minimum efficient scale", which is connected to intangible capital in 1st paragraph. In the 2nd paragraph. Told you that you will dominate the industries if you achieved that scale. Competitor must do more to compete with you. (A) properly stated the main idea.

(E), passage does not discussed the reason why manufacturers not achieve their scale. Thus incorrect.
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   05 Oct 2017, 18:31
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omidsa wrote:
The Official Guide for GMAT Review, 13th Edition, 2012

Practice Question
Question No.: RC 37 ~ 41
Page: 382

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

　　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.
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
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



Passage: Economies of Scale

Question: Infer Advantage

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word suggests in the question stem indicates that this is an Inference question. Specifically, what can you infer regarding what a manufacturer must do in order to gain a decisive advantage?

Step 2: Find the Support

Overall, the correct question should go along with the main idea that it is important to invest in intangible capital, not just tangible capital (in which everyone already invests).

Where does the author talk about competitive advantage? Primarily in paragraph two:

“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.”

It isn’t necessary to be the first to build a plant, but it is important to be one of the first to maximize the full potential of a plant. What is the full potential? It has to do with maximizing economies of scale. From paragraph one:

“ … 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.”

Step 3: Predict an Answer

It’s crucial, then, to be among the first to figure out how to achieve economies of scale (aka, minimum efficient scale). If so, then you may be able to dominate the market.

Step 4: Eliminate and Find a Match

(A) This choice may be tempting because it copies language from the passage exactly, but the underlying message contradicts the passage. The important thing is not necessarily to be the first to build up that plant; rather, it’s important to be among the first to achieve economies of scale.

(B) The first paragraph does mention fixed and sunk costs, but does not do so in the context of competitive advantage in particular.

(C) CORRECT. This choice matches the predicted answer: the first company or companies to achieve economies of scale can dominate the market.

(D) This choice sounds great in the real world (quality must be important, right?) but the passage does not address quality as a factor in gaining competitive advantage.

(E) The first paragraph does discuss the importance of ensuring a steady flow of raw materials, but does not do so in the context of competitive advantage in particular. (And note that a steady flow is not the same thing as stockpiling.)
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   25 Nov 2015, 11:31
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Paragraph - 1 : Manufac have to concentrate more than building plants & machinery

Paragraph - 2 : Minimum efficient scale requires not only on technology but throughput ( sale/production of goods ) but on the intangible capital. Discusses problems associated with inflow and out flow of goods / raw materials. Introduces definitions of -

Potential economies of scale ( tangible )= Based on the physical and engineering characteristics
Realized economies of scale ( intangible )= Human skills

Paragraph - 3 : Stresses the importances & Challenge of intanglible capital to attain economies of scale.



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 -

Answer is option (C) - Clearly follows from the second paragraph

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

Answer is option (E) - Clearly follows from the second paragraph

Quote:
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.


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

Answer is option (A) - Clearly follows from the second paragraph

The second paragraph extends the claim made by the author in the first paragraph

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

What is throughput -
Quote:
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.


Our must be something which is not related to input/output of goods /raw materials.

So, option D is our answer.

5. The primary purpose of the passage is to

Answer is undoubtedly (A) { Summarizing all the paragraphs }
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   02 Mar 2020, 09:43
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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.
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   21 Sep 2021, 06:31
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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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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   21 Jun 2022, 08:44
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Question 5


woohoo921 wrote:
GMATNinja wrote:
Push2808 wrote:
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.

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

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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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   24 Aug 2021, 12:47
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Push2808 wrote:
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!
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   03 Apr 2022, 10:36
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ag153 wrote:
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

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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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   11 May 2023, 12:44
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Question 1



zoezhuyan wrote:
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

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 [#permalink] New post   Updated on: 21 Mar 2024, 10:41
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Lizshadehdg wrote:
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?


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!­

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.
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   07 Apr 2018, 07:10
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ernesto wrote:
Can any one pls explain me 1st and 5th questions below?
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
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

Here a, b, d gets directly eliminated. I am confused between a and e.

5. The primary purpose of the passage is to
A. 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
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

5th Qn - I am confused between a and e
a - talks about intangible capital importance. Last line of 1st parra says, for potential economies of scale, investment in tangible capital needed and for realized economies of scale, investment in intagible capital needed. So , a becomes part of primary purpose. Pls correct me if i am wrong here.
e - 1st line of 1st para says, manufacturer needs to do more than constructing large sized plants to acheive economies of scale. So, large plans need not necessarily acheive economies of scale. So, why can't e be agreed to?


The main idea of passage is "minimum efficient scale", which is connected to intangible capital in 1st paragraph. In the 2nd paragraph. Told you that you will dominate the industries if you achieved that scale. Competitor must do more to compete with you. (A) properly stated the main idea.

(E), passage does not discussed the reason why manufacturers not achieve their scale. Thus incorrect.


I disagree with your explanation because even though the conclusion is
"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."

the main idea of the paragraph is the interplay between tangible vs intangible capital. I think A is definitely the main idea of the 2nd paragraph, but not the passage as a whole.

Can someone chime in?
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Re: Manufacturers have to do more than build large manufacturing [#permalink] New post   09 May 2018, 19:31
P1 - economies of scale, minimum efficient scale >>> maximize throughput; How is given
P2 - effects of things applied in P1.

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 - no
B. make every effort to keep fixed and sunk costs as low as possible - yes, tru but only this will not achieve the goal.
C. be one of the first to operate its manufacturing plants at minimum efficient scale -- "minimum efficient scale" is what we are trying to achieve. if one is first to achieve it then well and good.
D. produce goods of higher quality than those produced by direct competitors - no
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials - no
--------------------------------------------------

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

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

3. In the context of the passage as a whole, the second paragraph serves primarily to
Look at P2 - summery of 2nd para
A. provide an example to support the argument presented in the first paragraph

--------------------------------------------------

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 ~~~~~~~~
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
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Re: Manufacturers have to do more than build large manufacturing [#permalink]
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