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# Profits for one of Company X's flagship products have been declining

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Joined: 08 Jun 2013
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Location: France
GMAT 1: 200 Q1 V1
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Profits for one of Company X's flagship products have been declining  [#permalink]

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14 Oct 2018, 09:26
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Difficulty:

55% (hard)

Question Stats:

61% (01:40) correct 39% (01:47) wrong based on 118 sessions

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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 a resultant increase in the production cost?
E) What percentage of Company X's revenues is represented by sales of the flagship product in question?

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Re: Profits for one of Company X's flagship products have been declining  [#permalink]

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14 Oct 2018, 09:48
Harshgmat wrote:
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 a resultant increase in the production cost?
E) What percentage of Company X's revenues is represented by sales of the flagship product in question?

Let's break down the passage:
1. profits from one product have been declining.
2. (because) inflation has increased production cost (and) 3. customers don't think the features are worth the price
4. (therefore) stop making product, make only products with increasing margins

As the logic between the statements is extremely clear, we'll try to infer our answer directly from the question stem.
This is a Precise approach.

Specifically, we're asked if (4) is a good decision, so we'll try to find facts that will make it a bad decision. In particular, as the CFO says he wants products with 'increasing margins' we'll look for data that would make the margins increase. This is most likely something that negates the original reason they decreased - i.e. (2) and (3). For example, a deflation would negate (2) and something which makes customers more willing to pay would negate (3). Looking at our answers, (D) does exactly this - it negates (3) by saying that additional features can be added at no cost, which negates the reasoning that customers won't pay because there aren't enough features.

Note that (C) is weaker than (D) because (a) it doesn't directly address any of the previously raised issues and (b) it might increase total revenue and overall profit but would not change the profit margins per individual product, as presumably the new customer base still wouldn't want to pay a higher price.
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Re: Profits for one of Company X's flagship products have been declining   [#permalink] 14 Oct 2018, 09:48
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