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# Modern manufacturers, who need reliable sources of materials

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Modern manufacturers, who need reliable sources of materials  [#permalink]

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04 Jul 2012, 08:00
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Question 1
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based on 240 sessions

64% (03:16) correct 36% (02:36) wrong

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Modern manufacturers, who need reliable sources of materials and technologically advanced components to operate profitably, face an increasingly difficult choice between owning the producers of these items (a practice known as backward integration) and buying from independent producers. Manufacturers who integrate may reap short-term rewards, but they often restrict their future capacity for innovative product development.

Backward integration removes the need for some purchasing and marketing functions, centralizes overhead, and permits manufacturers to eliminate duplicated efforts in research and development. Where components are commodities (ferrous metals or petroleum, for example), backward integration almost certainly boosts profits. Nevertheless, because product innovation means adopting the most technologically advanced and cost-effective ways of making components, backward integration may entail a serious risk for a technologically active company—for example, a producer of sophisticated consumer electronics.

A company that decides to make rather than buy important parts can lock itself into an outdated technology. Independent suppliers may be unwilling to share innovations with assemblers with whom they are competing. Moreover, when an assembler sets out to master the technology of producing advanced components, the resulting demands on its resources may compromise its ability to assemble these components successfully into end products. Long-term contracts with suppliers can achieve many of the same cost benefits as backward integration without compromising a company’s ability to innovate.

However, moving away from backward integration is not a complete solution either. Developing innovative technologies requires independent suppliers of components to invest huge sums in research and development. The resulting low profit margins on the sale of components threaten the long-term financial stability of these firms. Because the ability of end-product assemblers to respond to market opportunities depends heavily on suppliers of components, assemblers are often forced to integrate by purchasing the suppliers of components just to keep their suppliers in business.
According to the passage, which of the following relationships between profits and investments in research and development holds true for producers of technologically advanced components?
1) Modest investments are required and the profit margins on component sales are low.
2) Modest investments are required but the profit margins on component sales are quite high.
3) Despite the huge investments that are required, the profit margins on component sales are high.
4) Because huge investments are required, the profit margins on component sales are low.
5) Long-term contractual relationships with purchasers of components ensure a high ration of profits to investment costs.

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Re: Profits and investments in research  [#permalink]

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05 Jul 2012, 05:52
No one have tried to answer this question ?? ........hey guys is a really good question to practice.
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Re: Modern manufacturers, who need reliable sources of materials  [#permalink]

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08 Jul 2012, 12:24
2
D

in the last para it says that "Developing innovative technologies requires independent suppliers of components to invest huge sums in research and development. The resulting low profit margins on the sale of components threaten the long-term financial stability of these firms."
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Re: Modern manufacturers, who need reliable sources of materials  [#permalink]

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09 Jul 2012, 16:31
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Nice. Is the same answer I gave

+ 1 Kudos
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Re: Modern manufacturers, who need reliable sources of materials  [#permalink]

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07 Aug 2012, 21:47
Answer D , last para first line sums it up very well
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Re: Modern manufacturers, who need reliable sources of materials  [#permalink]

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25 Aug 2012, 11:27
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I think its D, its explicitly mentioned in the last paragraph
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Modern manufacturers, who need reliable sources of materials  [#permalink]

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14 Jan 2015, 06:42
2
carcass ,
You can add one more question to this passage...
The official GMAT exam (GMAC) posted the same passage and the following question in its Facebook page - "This Week's Question"

Which of the following best describes the way the last paragraph functions in the context of the passage?

A) The last in a series of arguments supporting the central argument of the passage is presented.
B) A viewpoint is presented which qualifies one presented earlier in the passage.
C) Evidence is presented in support of the argument developed in the preceding paragraph.
D) Questions arising from the earlier discussion are identified as points of departure for further study of the topic.
E) A specific example is presented to illustrate the main elements of the argument presented in the earlier paragraphs.

OA is (B)

Explanation ->
This question asks you to choose the statement that best describes the function of the last paragraph of the passage. The best answer is B. At the end of the third paragraph, the author indicates that assemblers benefit from contracting with, rather than owning, independent suppliers. In the last paragraph however, the author indicates that contracting with independent suppliers can itself present problems. Thus the last paragraph qualifies the viewpoint presented at the end of the third paragraph. Choice A is not the correct answer because the passage makes several points about backward integration, but does not present a central argument about this topic. Choice C is not the correct answer because the final paragraph qualifies rather than supports an argument made in the third paragraph about contracting with independent suppliers. Choices D and E are incorrect because the final paragraph does not identify questions or present a specific example.
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Re: Modern manufacturers, who need reliable sources of materials  [#permalink]

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16 Mar 2015, 07:29
Developing innovative technologies requires independent suppliers of components to invest huge sums in research and development.
The resulting low profit margins on the sale of components threaten the long-term financial stability of these firms.

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Re: Modern manufacturers, who need reliable sources of materials  [#permalink]

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06 Apr 2017, 23:41
IMO its D last paragraph 2nd line clearly states that - huge investments are required for R and D in tech advanced techies- So They fail to get enough profits leading contractors to acquire them
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Re: Modern manufacturers, who need reliable sources of materials  [#permalink]

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21 Oct 2018, 19:36
Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

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Re: Modern manufacturers, who need reliable sources of materials &nbs [#permalink] 21 Oct 2018, 19:36
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