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# The price the government pays for standard weapons purchased

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Joined: 20 Jun 2013
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Re: The price the government pays for standard weapons purchased  [#permalink]

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10 Sep 2013, 00:06
pqhai wrote:
Hi naaangerleyanyetei.
I'm happy to help.

ANALYZE THE STIMULUS:

Fact: The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.”
Fact: Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.
Conclusion: “historical costing’ is an economically sound pricing method for military contracts

KEY formula is: BEGINNING PRICE + ADJUSTMENT = NEW PRICE

Assumption: For new price to be correct, we need BOTH beginning price and adjustment MUST be correct. The argument assumes that both sources of information are correct.

(A) The government might continue to pay for past inefficient use of funds.
Correct. A shows that the “beginning price” may be wrong, so even though the adjustment is correct, the final price is still wrong.

(B) The rate of inflation has varied considerably over the past twenty years.
Wrong. SHELL GAME. It does NOT matter how much the rate of inflation has varied, because when it change, the “new” adjustment immediately will be added to the new price.

(C) The contractual price will be greatly affected by the cost of materials used for the products.
Wrong. Out of scope. The Cost of material ONLY makes the price go up and down. But the contractors can protect their profits because their final prices are correctly calculated.

(D) Many taxpayers question the amount of money the government spends on military contracts.
Wrong. Out of scope 100%. Nothing about “taxpayers” here.

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
Wrong. Out of scope. We only talk about “price” and how to calculate it correctly. Nothing about “innovative”.

Hope it helps.

Hello Pqhai,
Thanks for your excellent explanation, I understand it now.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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23 Oct 2013, 22:07
I selected A for exclusion. I would like to understand the logic behind this answer. Hope somebody will help me with some nice explanation supported by some good example. Thanks
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Re: The price the government pays for standard weapons purchased  [#permalink]

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04 Jan 2014, 07:44
The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called "historical costing." Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year's contractual price.
Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

A The government might continue to pay for past inefficient use of funds.
B The rate of inflation has varied considerably over the past twenty years.
C The contractual price will be greatly affected by the cost of materials used for the products.
D Many taxpayers question the amount of money the government spends on military contracts.
E The pricing method based on historical costing might not encourage the development of innovative weapons.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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04 Jan 2014, 08:26
In this question, we are looking for a basis with which to criticize historical costing as being economically sound.

a) This is correct. If the government made a blunder and overpaid one year, then this pricing practice will force the government to continually overpay every year (adding an inflation percentage to an already bloated figure). This is by definition not economically sound.

b) This is why this practice is being utilized, and doesn't make it economically unsound. Wild inflation encourages the use of this practice in order to protect the contractors from inflation. This is the purpose of this practice.

c) The base contractual price can changed based on different materials, but this policy will hold the price of these materials constant + adding inflation. This does not make it economically unsound. Just like ordering more materials will increase the price, so will the cost of those materials.

d) This is very out of scope. We are not discussing whether taxpayers' agree with the money being spent overall

e) Again, out of scope. We are simply focused on whether this one practice is economically sound, not on any other ramifications of it.

I hope this helps!!!
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Re: The price the government pays for standard weapons purchased  [#permalink]

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04 Jan 2014, 08:41
The question seems easy. Option A is the best choice.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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04 Jan 2014, 11:16
Merged similar topic.

Use the search button...is easy.

regards
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Re: The price the government pays for standard weapons purchased  [#permalink]

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04 Jan 2014, 16:35
sagarsabnis wrote:
Official Guide for GMAT Verbal Review, 2nd Edition
Practice Question
Question No.: 4
Page: 117
Difficulty:

The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
(B) The rate of inflation has varied considerably over the past twenty years.
(C) The contractual price will be greatly affected by the cost of materials used for the products.
(D) Many taxpayers question the amount of money the government spends on military contracts.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

The conclusion is it is economically unsound to pay the contractors by adding an amount to the previous year's price

We should strengthen this.

Negate the conclusion: it is NOT economically unsound to add an amount to the previous year's price

Since this is a strengthen question the choice should be such that it refutes the negated conclusion.

Choice A does it best because it says it would indeed be unsound because the use of funds in the past may have been inefficient and is not corrected.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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04 Jan 2014, 16:36
Quote:
Practice Question
Question No.: 4
Page: 117
Difficulty:
[/textarea]

The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
(B) The rate of inflation has varied considerably over the past twenty years.
(C) The contractual price will be greatly affected by the cost of materials used for the products.
(D) Many taxpayers question the amount of money the government spends on military contracts.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

The conclusion is it is economically unsound to pay the contractors by adding an amount to the previous year's price

We should strengthen this.

Negate the conclusion: it is NOT economically unsound to pay by adding an amount to the previous year's price

Since this is a strengthen question the choice should be such that it refutes the negated conclusion.

Choice A does it best because it says it would indeed be unsound because the use of funds in the past may have been inefficient and is not corrected.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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12 Jan 2014, 13:30
With option A, i had problem in understanding the meaning of " use of funds" ….. it does not mean "the original cost" to me !!!
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Re: The price the government pays for standard weapons purchased  [#permalink]

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12 Jan 2014, 19:27
Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

The best basis for a criticism of historical costing as an economically sound pricing method for military contracts-------------
WE ARE LOOKING FOR FLAW IN THE SYSTEM....... It could be.....May be now the cost of the material has decreased but we continue last year rates or last year we erroneously paid more so we are forced to continue that now or may be last year special circumstances meant more cost.......

(A) The government might continue to pay for past inefficient use of funds......APPEARS OK
(B) The rate of inflation has varied considerably over the past twenty years.....SO WHAT? IT HAPPENS
(C) The contractual price will be greatly affected by the cost of materials used for the products.....BUT THAT DOES'NT AFFECT US.. WE ARE PAYING AS PER LAST YEAR....
(D) Many taxpayers question the amount of money the government spends on military contracts.IRRELEVANT.. WE HAVE TO PURCHASE...
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.IRRELEVANT

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Re: The price the government pays for standard weapons purchased  [#permalink]

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14 Mar 2014, 07:38
i Am bit worried abt the rules that i learned in Powerscore CR bible.

Can a weaken question be with out Conclusion?
Wat is the conclusion in this question?

Rrsnathan.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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08 Apr 2014, 04:59
B is wrong because of another reason- it does not mention whether the variation has been positive or negative. It just says- the rate "varied".

This is called language shift and is to be avoided.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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18 Apr 2014, 10:44
I narrowed down to A and E

A is a weakener.

Wats prob wit E)
(E) The pricing method based on historical costing might not encourage the development of innovative weapons - It cretizise saying innovation wont be there.

Plz ezplain y this is wrong

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Re: The price the government pays for standard weapons purchased  [#permalink]

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09 Dec 2014, 05:58
sagarsabnis wrote:
Official Guide for GMAT Verbal Review, 2nd Edition
Practice Question
Question No.: 4
Page: 117
Difficulty:

The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
(B) The rate of inflation has varied considerably over the past twenty years.
(C) The contractual price will be greatly affected by the cost of materials used for the products.
(D) Many taxpayers question the amount of money the government spends on military contracts.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

Conclusion : historical costing is done using base amount + delta as per inflation.
option A suggest clear reason why someone will criticize this policy.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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01 Feb 2015, 00:43
pqhai wrote:
Hi naaangerleyanyetei.
I'm happy to help.

ANALYZE THE STIMULUS:

Fact: The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.”
Fact: Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.
Conclusion: “historical costing’ is an economically sound pricing method for military contracts

KEY formula is: BEGINNING PRICE + ADJUSTMENT = NEW PRICE

Assumption: For new price to be correct, we need BOTH beginning price and adjustment MUST be correct. The argument assumes that both sources of information are correct.

(A) The government might continue to pay for past inefficient use of funds.
Correct. A shows that the “beginning price” may be wrong, so even though the adjustment is correct, the final price is still wrong.

(B) The rate of inflation has varied considerably over the past twenty years.
Wrong. SHELL GAME. It does NOT matter how much the rate of inflation has varied, because when it change, the “new” adjustment immediately will be added to the new price.

Hi, Although I agree with most of explanations. There's a small doubt with ref to choice B.

Suppose last year the historiacal price was say 100 and the inflation was 100% leading to a pricing of 200(for example sake) by the contractors to save their profits.
This year lets say the inflation is -100% (or hyper-deflation). Now according to the ques the current pricing will be based on the last year price (of 200) and since their is no inflation the contractors dont need to save their profits as they are already geeting the double amount. The question doesnt say that the contractors subtract a percentage reduction to adjust for inflation. So if the pricing is 200 for this year isnt that a source of criticism too?

Thanks in advance for you insight and responses
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Re: The price the government pays for standard weapons purchased  [#permalink]

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22 Feb 2015, 11:00
Unfortunately none of the explanations convinced me. I've picked a right answer by POE.

The overall mood of the argument: The author is actually concerned about the goverment and the justness of such contact types, and not about military contractos.

(A) The government might continue to pay for past inefficient use of funds --> CORRECT. Only this sentence told us something about economical issues..
(B) The rate of inflation has varied considerably over the past twenty years --> That's the normal circumstance for the inflation, this is how it works.
(C) The contractual price will be greatly affected by the cost of materials used for the products --> Price = Cost + Margin, the price in the contract doesn't change, contractors get just Inflation rate on top. And is by the way a problem from a contractor not for a goverment that pays fix prices.
(D) Many taxpayers question the amount of money the government spends on military contracts --> has nothing to do with an economically sound method for a goverment. In any case taxpayers will question the amount spent.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons --> Ok, and what should take here a role of economically negative impact on goverment ? Irrelevant.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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27 Jul 2015, 02:20
Thanks for all the explainations on the threads, i guess my problem arised from other aspects - I can not get a better understanding of what choice A means or refer to, especially by the word"funds"(ehh, what's meaning by saying "pay for past inefficient use of funds"? there is military related funds not effective used, but why pay for it???), then I have to chose from the best one from the remaining choices.........
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Re: The price the government pays for standard weapons purchased  [#permalink]

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27 Jul 2015, 04:07
Do we need to think from contractor's point of view or from government's point of view.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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29 Oct 2015, 12:04
sagarsabnis wrote:
And thats the OA.

I had picked E as the answer thinking that of the new weapons are not going to be developed then why should government invest in it. That was my thinking. Can anyone explain why this is wrong?

Main idea is that if "historical costing" method is used by the contractors then government pays previous year's contractual price PLUS inflation adjustment. We need to choose an option which criticizes economical soundness of historical costing.

To me also, option E is very tempting because this is the only option which clearly states a problem with the use of historical costing, secondly no other option seems to justify the problem related to historical costing. Unfortunately, option E is a trap because when contractor's price their contracts their price cover all costs including labor, material, and R&D costs. Inflation adjustment in historical costing further protect contractors by keeping the contract price same and adding an inflation premium. Therefore, historical costing doesn't hurt innovation.

Now let's eliminate other irrelevant answer choices. Option B and C are clearly incorrect because variation in rate of inflation will be adjusted in historical costing method and cost of materials is already paid in previous years. Option D is a general problem which regardless of the issue at hand would exist.

We are left with option A. My problem with option A is its language, it is difficult to understand the meaning of "past inefficient use of funds" here reader has to ASSUME that it could mean "past over priced contracts". Ironically, on one hand GMAT stresses upon the clarity of sentences in sentence correction, but on the other hand it uses difficult language in critical reasoning and reading comprehension to stress the reader.
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Re: The price the government pays for standard weapons purchased  [#permalink]

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29 Oct 2015, 12:08
1
tvrs09 wrote:
Do we need to think from contractor's point of view or from government's point of view.

Knowing that "Government" is the main subject of this passage, I would take government's point of view.

This question sucks in many ways
Re: The price the government pays for standard weapons purchased &nbs [#permalink] 29 Oct 2015, 12:08

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