GMAT weekly questions
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.
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?
A. Modest investments are required and the profit margins on component sales are low.
B. Modest investments are required but the profit margins on component sales are quite high.
C. Despite the huge investments that are required, the profit margins on component sales are high.
D. Because huge investments are required, the profit margins on component sales are low.
E. Long-term contractual relationships with purchasers of components ensure a high ration of profits to investment costs.
OA:
This question asks you to identify information presented in the passage about the relationship between profits and investments for producers of technologically advanced components.
The best answer is D. The passage indicates the high investments required to develop technologically advanced components can lead to low profit margins for producers of such components.
Choice A is incorrect because the passage indicates that large, not modest, investments in research and development are required.
Choices B and C are incorrect because the passage indicates that profit margins for producers of technologically advanced components are low, not high as these answer choices assert.
Choice E is incorrect: although the author claims that long-term contracts with suppliers are beneficial to assemblers, the passage does not indicate that long-term contracts with purchasers lead to high profits for producers of technologically advanced components.