Magnavox, a company that makes gaming consoles and games, has seen

Question

Magnavox, a company that makes gaming consoles and games, has seen, through the years, declining profits for its flagship product, GameBox 1. The CFO of Magnavox investigated the issue and determined that an increase in chip costs had raised the cost of producing the console but consumers who were surveyed had reported that they weren‖t willing to pay more than the lower price that GameBox 1 was selling at the time of its launch. As a result, the CFO recommended that the company stop producing this product because the CEO wanted to sell only products whose profit margins were increasing.

The answer to which of the following questions would be most useful in evaluating whether the CFO’s decision to divest the company of its flagship product is warranted?

(A) Does the company have new and profitable products available with which to replace the flagship product?
(B) Is there a way to alter the manufacturing or distribution processes in order to reduce the cost to produce the flagship product? 
(C) How will Magnavox's brand name be impacted if they stopped producing GameBox 1? 
(D) Are there additional features which could be added to the product and for which consumers might be willing to pay a higher price? 
(E) What percentage of Magnavox's revenues are represented by the sales of the flagship product in question?

PoojanB · Answer

The decision to divest the company from its flagship product is due to the fact that CEO only ''wanted to sell only products whose  profit margins  were increasing.''

Keeping in mind the profit margin,let's analyze the given choices:

(A)Does the company have new and profitable products available with which to replace the flagship product?  No mention of new products in the question stem.Also CEOs argument is about keeping the profitable products and not adding the new ones. A is out 
(B)Is there a way to alter the manufacturing or distribution processes in order to reduce the cost to produce the flagship product? Well if this is true than the CFO's decision will be totally unjustified. B is the winner 
(C) How will Magnavox's brand name be impacted if they stopped producing GameBox 1? Similar to A. Unrelated to the question in picture. C is out too. 
(D) Are there additional features which could be added to the product and for which consumers might be willing to pay a higher price? This one was tempting to me. But additional features would also add to the cost and thus there are chances for profitability to remain constant. D is out 
(E) What percentage of Magnavox's revenues are represented by the sales of the flagship product in question? No relation with profitability of particular product. E is out too

Yellkrishna · Answer

The CEO only wanted products which could fetch increasing amount of profit margin. If not, they have to be discarded. 
Hence CFO asked to discontinue the GB1 because it was not fetching increased margins. 
The question asked is whether the decision to divest from the GB1 is warranted. 
A. It doesn’t answer the question. 
B. By doing so, if the profits margin can be increased, then the CFO’s mandate to stop production can be halted. 
C. This doesn’t answer the profit margin issue. 
D. Additional features may cost additionally. Higher price does not mean higher profit margin. 
E. It could be a big percentage of the revenue, but the CEO’s mandate was to increase the profit margin. This doesn’t answer it. 
Hence B.

Posted from my mobile device

sssanskaar · Answer

Between options B and D. Option D does not address the cost of adding additional features. Option B wins.

sarthakaggarwal · Answer

What foes warranted means here?
Do we have to justify the CEO's decision?

S1ny1s · Answer

why E is not the answer. we know that profit margin = revenue of the company(# Quantity sold * unit price) - other cost / revenue of the company . we don't the the total revenue of the company. that why the options e is out or any other reasons. 
Can GMat Whizz provide more clearer explanation to clear my doubt on this options choices?

gullyboy09 · Answer

Hi  KarishmaB , can you please help me with why D is not correct? And even if correct, how to pick B over D? I see both the ways would be good to know. If we can lower the CP and maintain the profit margin, its good (option B). Similarly if we can add one feature, and if people willing to pay high price because of that feature then it is also good. Now feature itself might cost something, but we can charge more also to maintain the margin, and because feature is so good, people are willing to pay. SO knowing both would help.

guddo · Answer

Magnavox, a company that makes gaming consoles and games, has seen, through the years, declining profits for its flagship product, GameBox 1. The CFO of Magnavox investigated the issue and determined that an increase in chip costs had raised the cost of producing the console but consumers who were surveyed had reported that they weren‖t willing to pay more than the lower price that GameBox 1 was selling at the time of its launch. As a result, the CFO recommended that the company stop producing this product because the CEO wanted to sell only products whose profit margins were increasing.

The answer to which of the following questions would be most useful in evaluating whether the CFO’s decision to divest the company of its flagship product is warranted?

The argument says GameBox 1 has declining profits because chip costs increased, while consumers are not willing to pay more for the current product. Since the CEO wants only products with increasing profit margins, the CFO recommends stopping production.  The key issue  is whether Magnavox can  restore or improve the product’s profit margin  without raising its selling price.

(A) Does the company have new and profitable products available with which to replace the flagship product?

This is somewhat relevant to business planning, but it does not directly evaluate whether stopping GameBox 1 itself is justified. The issue is whether GameBox 1 can still have improving margins.

(B) Is there a way to alter the manufacturing or distribution processes in order to reduce the cost to produce the flagship product?

This is correct. If Magnavox can reduce production or distribution costs, then GameBox 1’s profit margin could increase even if the selling price stays the same. If it cannot reduce costs, the CFO’s recommendation becomes stronger.

(C) How will Magnavox's brand name be impacted if they stopped producing GameBox 1?

This may matter generally, but it does not directly address the CEO’s stated criterion: selling products whose profit margins are increasing.

(D) Are there additional features which could be added to the product and for which consumers might be willing to pay a higher price?

This is relevant, but weaker than (B). Even if customers would pay more for added features, we would still need to know whether those features would cost less than the extra price charged.

(E) What percentage of Magnavox's revenues are represented by the sales of the flagship product in question?

This tells us how important GameBox 1 is to revenue, but revenue is not the same as profit margin. A product can have high revenue and still have declining margins.

Answer: (B)

Magnavox, a company that makes gaming consoles and games, has seen

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Magnavox, a company that makes gaming consoles and games, has seen

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