Profits for one of Company X's flagship products have been declining slowly for several years. The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they weren't willing to pay more than the current price. As a result, the CFO recommended that the company stop producing this product because the CEO only wants products whose profit margins are 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. Will the rest of Company X's management team agree with the CFO's recommendation?

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

D. Is there a way to alter the manufacturing or distribution processes in order to reduce the cost to produce the flagship product?

E. What percentage of Company X's revenues is represented by sales of the flagship product in question?

D for me.

If the distribution and manufacturing costs can be reduced, the profit can be increased. C on the other hand does not address whether additional features require additional cost to add.

Crick

Hi,

One way to attack CR is to make the information manageable by breaking it down the essentials:

1. The products profits are decreasing because consumers are not willing to pay the increased price (do to inflation/production costs) for this product considering the features

2. The CEO only wants to focus on products whose profits are increasing

3. Therefore the CEO wants to discontinue the product

So D is the only one that addresses the above: if the features can be augmented without increasing the price then perhaps consumers will respond by buying more. You can justify the idea of price because The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they felt the product’s functionality didn't justify a higher price. So the logic is can we add functionality which will justify the higher price (caused by inflation/production costs) without adding to the price. If we can do this the idea is that consumers will buy more of the product (because it has more features and the price stayed the same) and increase the profit from the product. Also, just because the cost does not increase does not mean that the price to the consumers doesn't increase. The real focus here is that the price is too high considering the features.

I hope this helps!

HG.
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Profits for one of Company X's flagship products have been declining slowly for several years. The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they felt the product’s functionality didn’t justify a higher price. As a result, the CFO recommended that the company stop producing this product because the CEO only wants products whose profit margins are 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 Will the rest of Company X's management team agree with the CFO's recommendation?

C Can Company X sell the flagship product to new markets to increase its customer base?

D Are there additional features that could be added to the product without raising the unit price?

E What percentage of Company X's revenues is represented by sales of the flagship product in question?


The CFO wants to withdraw this product as the CEO wants only those products whose profit margins are increasing.

Profit margin= Profit/Revenue per unit of the product.
Sp->Selling price of the product
CP->Cost price to produce the product

I am not sure what unit price means in choice D. Does it mean the cost of production to the company or the cost to the buyer in the market?
Unit price should generally mean cost of the product in the market i.e the SP from the manufacturer's side.

Let us take this scenario:

SP CP Profit margin Sales Net profit Year
200 100 0.5 100 10000 1
200 120 0.4 100 8000 2
200 142 0.29 100 5800 3
272 170 0.6 50 5050 4

So, assuming that the costs of production go up by 20% each year, and that the manufacturer cannot increase his selling price, for he fears that he will lose sales, we can see that the profit margins continue to fall(in the first three years).

In the case that the manufacturer does increase his selling price to counter the loss in profit margins, the people will stop buying his product as they feel that spending so much for the features on offer is not worth their money.

So, if the CFO wants to increase his margins, he must only reduce his internal manufacturing cost or add new features to the product(without increasing his own production cost) so that he can command a higher price for his product.


Case 1: unit price=cost of production
If he is able to add new features to this product,without adding on his own costs, and people are willing to spend more for those new features, then this plan will be a success. In this case , maybe the year 4 scenario will not happen.
The CFO will probably be able to increase the profit margins, and everyone is happy(including me).

Case 2:
unit price=cost to buyer or selling price from the manufacturer
Now, if unit price is kept constant(i.e the his selling price), then perhaps his sales will go up , but how will his margins increase?

In this scenario, I see no difference between choice C and D.

In the end, it all boils down to the trivial matter of what unit price means in this context. In hindsight, maybe it was too obvious.But , that was what made me choose choice C.
In my knowledge unit price has always meant the price that a product sells for.

If, choice D had said, the unit price of production, then it would have been a clear picture.

Please help me with this.

Thanks.

Dear SravnaTestPrep,



SP CP Profit margin Sales Net profit Year
200 100 0.5 100 10000 1
200 120 0.4 100 8000 2
200 142 0.29 100 5800 3
272 170 0.6 50 5050 4


As you can see from this table, if the unit price of the product does not go up , then how will the profit margin increase?

If the CFO increases the unit price of the product,while adding some new features , then perhaps the consumers will feel that the product is worth the higher price.

The argument states that "the consumers who were surveyed reported.....".

The company is considering whether to increase price or not. But, without further features the consumers will not accept the price rise.Thus, it will introduce further features that justify the higher price, but without increasing its production cost.

If we speak in terms of the sample data- if the company can increase its unit price to 272, then the profit margins will increase,keeping in mind the increasing cost of production.

Though choice D will ensure that the consumers are ready to buy the product, by saying that the unit price remains the same ,it nullifies the scope for increase in profit margin.

If the price has already gone up to a level that the profit margins have been taken care of, but the main problem is the lack of customers, then why is choice C incorrect?

I mean, as you said, the price at which the product is selling is going up because of the corresponding increase in production costs, but the customers have stopped buying the product.

Increasing functionality will bring back the customers who stopped buying the product because of lack of functionality.

In this case, why won't exploring new markets that are ready to accept the product as it is be a good idea, as in choice C?

Dear 12bhang, blueseas,

The point is the price of the product has to increase because of inflation whether it be sold in the existing market or the new market. But we know the existing market is not accepting the increase in price.

Assume we evaluate as in C whether the company can sell the product in new markets? And assume we conclude we can sell. But we still do not know whether we can sell it at a price where the profit margin increases. So it is not the sales that is the focus but the margin according to the CFO.

The additional features are likely to fetch back the customers because, it is given that it is for the lack of additional features that the customers are resisting the higher price
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The CFO has discarded the product because he knew he cannot increase the price. Choice C talks only about increasing the customer base and not about the price. I do not think it directly addresses the question. Choice D specifically talks about price because evaluating it would give the information that the price in fact need not be increased and it is enough to increase the functionality and still increase the profit margin. So it gives a more definitive information on which the CFO could have acted given the other facts.
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Profits for a particular product have been going down and the CFO has determined that this is because, on the one hand, the cost to make the product has increased and, on the other, consumers won't pay more than the current price (recall that Profit = Revenues – Costs). The CEO only wants Company X to sell products with increasing profit margins; as a result, the CFO decides the solution is to stop making this product. This decision would make sense only if we can be assured that there is no way to have an increasing profit margin for the product in question.

(A) Whether there are new, profitable products does not address the issue of whether there is a way to achieve increasing profit margins for the flagship product.
(B) Whether the management team agrees with the CFO's recommendation does not address the issue of whether there is a way to achieve increasing profit margins for the flagship product.
(C) This may increase the revenues earned by the product, but this choice does not address the additional cost associated with new features, so we still do not know whether we can achieve increasing profit margins for the product. We may be able to, but we may not: the features may cost more than the increased price that consumers would be willing to pay.
(D) CORRECT. If the costs for the existing product can be reduced, then the profit margin will increase (again, recall that Profits = Revenues – Costs). If the costs cannot be reduced, then the profit margins will not increase.
(E) The flagship product's revenues as a percentage of total revenues does not address the issue of whether there is a way to achieve increasing profit margins for the flagship product (although it does highlight why the company might find itself with a big problem if it follows the CEO's advice!).
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Another Version of this question :

https://gmatclub.com/forum/profits-for- ... l#p2152073
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