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Modern manufacturers, who need reliable sources of materials and

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

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The Official Guide for GMAT Review, 10th Edition, 2003

Practice Question
Question No.: RC 257 ~ 260
Page: 402

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A company that decides to make rather than buy important parts can lock itself into an outdated technology.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.
1. According to the passage, all of the following are benefits associated with backward integration EXCEPT:

(A) improvement in the management of overhead expenses
(B) enhancement of profit margins on sales of components
(C) simplification of purchasing and marketing operations
(D) reliability of a source of necessary components
(E) elimination of unnecessary research efforts



2. According to passage, when an assembler buys a firm that makes some important component of the end product that the assembler produces, independent suppliers of the same component may

(A) withhold technological innovations from the assembler
(B) experience improved profit margins of on sales of their products
(C) lower their prices to protect themselves from competition
(D) suffer finanical difficluties and go out of business
(E) stop developing new versions of the component



3. 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 paragrap.
(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 argument presented in the earlier paragraphs.

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.


4. 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 lowl.
(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 components 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 ratio of profits to investment costs.




Q11 example is presented to illustrate the main elements of the argument presented in the earlier paragraphs.

Source : Manufacturing: The New Case for Vertical Integration
https://hbr.org/1988/03/manufacturing-the-new-case-for-vertical-integration

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

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New post 20 Dec 2012, 21:12
I think it's A. Ruled out the others using negation. What is the OA?
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New post 20 Dec 2012, 21:17
This is a good passage!

IMO Answer could be The last in a series of arguments supporting the central argument of the passage is presented.

Conclusion given in the argument is
Modern manufacturers face an increasingly difficult choice between owning the producers of these items (a practice known as backward integration) and buying from independent producers.

Premise:
Para 2 - 3 talk supports the conclusion of the argument by giving reasons as to why Backward Integration is beneficial.

Para - 4 (Last para):
Is a part of the premise which supports the conclusion.

Please let us know the OA and the explanation given. Thank you.
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 25 Oct 2014, 02:11
carcass

It would be really helpful, if you could post some answers with a note of why you think it is correct.

Thanks.
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New post 25 Oct 2014, 02:55
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 25 Oct 2014, 05:34
carcass wrote:
it is correct ..........which one of the question ??


I was implying that if it was possible to have possible explanations along with the given OAs.

However, after a second sound reading, i don't feel the need for any explanations but still i cannot seem to understand this last sentence
" assemblers are often forced to integrate by purchasing the suppliers of components just to keep their suppliers in business. "

It was clear in the above lines of the same last paragraph that suppliers of components need to make huge investments in innovative technologies and as a result play with low profit margins. And since the ability of end-product assemblers to respond to market opportunities depends heavily on suppliers of components then: the highlighted portion comes and i am gone for a toss.

Is it implying that the assemblers/manufacturers turn to backward integration/owning the suppliers(producers of components) just to keep there suppliers in business?
If so, then it does not really makes sense for a firm to be doing both purchasing/becoming self sufficient supplier as well as keeping their suppliers on roll as well.

So please kindly explain that, if possible.
Cheers.
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 26 Nov 2015, 08:11
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Funny thing, I've learnt a different meaning of the word qualified and it's variant 'qualifies' on this forum. It means to limit in some way,make less strong or positive. Never knew that before. Got up to 4 RC Qs wrong owing to this.
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 27 Aug 2016, 04:01
Hi, can someone explain the OA for question 9??? Since, no where is the reliability of the components are mentioned.
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New post 27 Aug 2016, 23:15
Reliability is the topic of the entire last paragraph. It says that suppliers are often financially unstable, leading the assembling companies to purchase their suppliers simply to keep them in business.
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 18 Sep 2016, 02:49
Question 9 tricked me

9. According to the passage, all of the following are benefits associated with backward integration EXCEPT:
(B) enhancement of profit margins on sales of components - You would think this was implicitly stated on the very first read

However read the below again
" 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"

Hence option (B) isn't necessarily true for consumer electronics.
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 18 Sep 2016, 06:40
I also got trapped in question 9. Thought B is supported but than later realized that it is not true for consumer electronics. Rest all correct. Time taken = 7.5 minutes.
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 22 Sep 2016, 06:40
Can somebody please help me with question no 12?

I have no idea where they have mentioned that because of the huge investments, the profit margins are low..
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 22 Sep 2016, 09:45
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please refer last para : " 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. "
- High R& D cost indirectly implies high Production cost. And hence low margins.

12. 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. - Does not imply any relationship
(B) Modest investments are required but the profit margins on component sales are quite high.- Not stated
(C) Despite the huge investments that are required, the profit margins on components sales are high. - The inverse is stated
(D) Because huge investments are required, the profit margins on component sales are low. - This is mentioned in the passage
(E) Long-term contractual relationships with purchasers of components ensure a high ratio of profits to investment costs.-Not stated
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 09 May 2018, 10:09
I got question one wrong :(

I chose "reliability of sources". Turns out its mentioned in the very first sentence and I was looking at the 2nd paragraph only.

Not a smart question in my opinion. but GMAT is GMAT so we have to suck it up, learn and move on.
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 24 May 2018, 09:30
Can anyone explain question no 1...

1. According to the passage, all of the following are benefits associated with backward integration EXCEPT:

(A) improvement in the management of overhead expenses
(B) enhancement of profit margins on sales of components
(C) simplification of purchasing and marketing operations
(D) reliability of a source of necessary components
(E) elimination of unnecessary research efforts

Why B is correct when it is said that BI boosts profit in 2nd para?
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 25 May 2018, 09:13
1. According to the passage, all of the following are benefits associated with backward integration EXCEPT:

(A) improvement in the management of overhead expenses - mentioned in para 2
(B) enhancement of profit margins on sales of components - mentioned in para 2 but it boosts profit for commodities, for others, it is a risk- correct
(C) simplification of purchasing and marketing operations - mentioned in para 2
(D) reliability of a source of necessary components- mentioned in para 1
(E) elimination of unnecessary research efforts - mentioned in para 2
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Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 08 Jun 2018, 08:39
Hi jennpt,

1. According to the passage, all of the following are benefits associated with backward integration EXCEPT:

(A) improvement in the management of overhead expenses
(B) enhancement of profit margins on sales of components
(C) simplification of purchasing and marketing operations
(D) reliability of a source of necessary components
(E) elimination of unnecessary research efforts

I did this question 3 weeks ago. I got it wrong. I just did it again, I got it wrong again :)

I get why D is wrong. The first sentence mentions Backward integration and buying from independent suppliers as options for manufacturers who need reliable sources of material. Therefore, a reliable source of material is a need that is achieved if one of those two options is selected. Therefore, it's a benefit. Although, I don't like it, I can live it with it.

Choice B says enhancement of profit margins on sales of components. This is true sometimes depending on component type. The choice doesn't say enhancement of profit margins on ALL sales of components. This is what threw me off a little bit: enhancement of profit margins on sales of components is a benefit sometimes. Is that enough to select this answer choice?

Many thanks in advance Jennifer.
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New post 10 Jun 2018, 13:47
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Hi oasis90

The problem with B is that the manufacturers are not selling components - instead, they assemble the components into some final product and sell that final product. Components are an input to the manufacturers, so they wouldn't look at selling components as a source of profit.
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 10 Jun 2018, 15:23
jennpt wrote:
Hi oasis90

The problem with B is that the manufacturers are not selling components - instead, they assemble the components into some final product and sell that final product. Components are an input to the manufacturers, so they wouldn't look at selling components as a source of profit.


oh. yes yes makes sense. I didn't think of it that way. need to step back sometimes.

Thanks a lot :-)
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Re: Modern manufacturers, who need reliable sources of materials and [#permalink]

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New post 14 Jun 2018, 23:53
Can someone explain the 3rd question ? What does "Qualify" mean in option B ?
Re: Modern manufacturers, who need reliable sources of materials and   [#permalink] 14 Jun 2018, 23:53

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