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The price the government pays for standard weapons purchased from mili

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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.
- Clearly defines why it is not economically sound pricing

(B) The rate of inflation has varied considerably over the past twenty years.
- It does not criticize the method. Just gives us extra information

(C) The contractual price will be greatly affected by the cost of materials used for the products.
- Nothing is mentioned about cost of material used

(D) Many taxpayers question the amount of money the government spends on military contracts.
- Nothing is mentioned about tax payers

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.
- Development of innovative weapons is irrelevant.
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Re: The price the government pays for standard weapons purchased from mili [#permalink]
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sarb wrote:
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?

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

Premise: Price determined by historical costing
Premise: Historical costing to protect profits
Conclusion: None

What needs to be done: Criticize historical costing

The government might continue to pay for past inefficient use of funds. - This is what we want. It will be grounds to criticize the point of historical costing.

The rate of inflation has varied considerably over the past twenty years. - If you understood the passage then this is an automatic eliminate. Inflation necessitated the need for historical pricing.

The contractual price will be greatly affected by the cost of materials used for the product. - Now this is out of scope. And of course, this won't criticize.

Many taxpayers question the amount of money the government spends on military contracts. - This is also out of scope.

The pricing method based on historical costing might not encourage the development of innovative weapons. Ah! This is a very tempting answer choice. But what makes it wrong? Read it carefully, it says "INNOVATIVE WEAPONS." The passage, in contrast, just talks about "STANDARD WEAPONS." This is a trap! This goes to show how ONE WORD COULD MAKE OR BREAK an answer choice.
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Ankit04041987 wrote:
Can any one elaborate why option a is correct and option b is incorrect

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

so we are looking for a option that will criticize historical costing.

for option A :The government might continue to pay for past inefficient use of funds.
explanation: If the initial pricing itself was wrong then the Govt will continue to pay for its past error in the future because of historical pricing this is weakening point. this point is criticizing the historical pricing method, this is what we are looking for.

for option B: The rate of inflation has varied considerably over the past twenty years.
explanation: is this point criticizing historical pricing? NO. rather this point is supporting historical costing

hope it helps
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Re: The price the government pays for standard weapons purchased from mili [#permalink]
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Agreed, Option A is the correct answer, however consider B for a moment.

Option B is attractive because the question mentions "economically sound pricing". Option B states that the rate of inflation "has varied considerably". Hence something varying can't be deterministic or sound eg. Stock prices. Aren't we criticizing historical costing this way, since the inflation prices factor in determining the current price ?? (from the q- "percentage increase, based on the current rate of inflation, to the previous year's contractual price")

sarb wrote:
Ankit04041987 wrote:
Can any one elaborate why option a is correct and option b is incorrect

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

so we are looking for a option that will criticize historical costing.

for option A :The government might continue to pay for past inefficient use of funds.
explanation: If the initial pricing itself was wrong then the Govt will continue to pay for its past error in the future because of historical pricing this is weakening point. this point is criticizing the historical pricing method, this is what we are looking for.

for option B: The rate of inflation has varied considerably over the past twenty years.
explanation: is this point criticizing historical pricing? NO. rather this point is supporting historical costing

hope it helps
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Re: The price the government pays for standard weapons purchased from mili [#permalink]
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sagarsabnis wrote:
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.

replying to a PVT message here I am

Now breaking down the argument

Quote:
The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.”

In a few words that means: the gov pay the industry based on the contract stipulated in the first ionstance. here, suddenly something must jumps at the top of my head

- the negative side is that I (goverment) pay the contract indipendently of whatsoever happens

- positive side is that the contract - maybe - is not influenced by the change of inflaction or other factors that comes up

Quote:
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.

Basically that means: the situation is freeze, always

(A) The government might continue to pay for past inefficient use of funds.

This is what Im looking for: if the contract by the gov is suscibed (right or wrong) we HAVE TO pay, anyway

(B) The rate of inflation has varied considerably over the past twenty years.

The rate is out of scope

(C) The contractual price will be greatly affected by the cost of materials used for the products.

The cost of material is NOT the key point of the argument. We care ONLy about of the dynamic of the contract itself

(D) Many taxpayers question the amount of money the government spends on military contracts.

Out od scope

(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

Out of scope

regards
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Re: The price the government pays for standard weapons purchased from mili [#permalink]
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I was trying to pick between A and B. I picked A.

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. - This means if the past price was more than the practical estimate, it would affect future prices as well. Correct choice.

(B) The rate of inflation has varied considerably over the past twenty years.- This choice confused me. But, say the rate was lower and lower for the past 20 years, it still makes sense to add some delta value to the price quote. I am assuming that the increase was +ve. But A sounds better as the price did not have any basis in the first place. Also, the more important fact is that it cannot be a basis for criticizing the method

(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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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.
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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 from mili [#permalink]
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 from mili [#permalink]
What is the type of this CR question? Is it a "Weaken the Argument" question?

Posted from my mobile device
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Re: The price the government pays for standard weapons purchased from mili [#permalink]
What is the type of this CR question? Is it a "Weaken the Argument" question?

Posted from my mobile device

Yes it is. Whenever you see the words "criticism" or "flaw" coupled more importantly with the phrase "Which of the following, if true..." you can take it to be a "weaken the argument" question.

- Matoo
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Im not satisfied here. I understand why A is correct and that was my first thought. But take a closer look at B:

Even if we have a negative inflation rate, a deflation, contractors have the right to "add a percentage increase to the previous year’s contractual price"? What if we have negative inflation for several years, do they still have the right to markup prices? Unsound!
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Re: The price the government pays for standard weapons purchased from mili [#permalink]
Bambi2021 wrote:
Im not satisfied here. I understand why A is correct and that was my first thought. But take a closer look at B:
Even if we have a negative inflation rate, a deflation, contractors have the right to "add a percentage increase to the previous year’s contractual price"? What if we have negative inflation for several years, do they still have the right to markup prices? Unsound!

From what I can understand of option B, we are talking about inflation and not deflation.

Even if the inflation is varied, there will always be a net addition to the contractual price of the last year.
New Price=CP of last year+ some %(based on Rate of inflation).

This will also protect manufactures from getting robbed of their profit because of rate of inflation. Overall this plan sounds good. When you compare this option with option A, A is weakening the concept much more precisely.

I hope that helps!
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Re: The price the government pays for standard weapons purchased from mili [#permalink]
sagarsabnis wrote:
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?

Need to focus on what historical costing is = by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price

Historical costing = Past price + Percent increase (re:inflation)

Choice (A) directly attacks this formula by saying government might continue to pay for PAST inefficient use of funds.

(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 from mili [#permalink]
If the original contractual price for the weapons purchased incorporated an inefficient use of funds, then, since
historical costing merely adds to the original price, it preserves these inefficiencies. An economically sound
pricing method should at least allow the possibility of reductions in price as such inefficiencies are removed.
Hence, A is the best answer. Because historical costing responds to inflation, B and C are consistent with the
economic soundness of historical costing-the rate of inflation and costs that are reflected in inflation. D offers no
67
grounds for questioning the economic soundness of historical costing in particular. Historical costing applies to
standard weapons only, not to the innovative weapons that are mentioned in E.
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Re: The price the government pays for standard weapons purchased from mili [#permalink]
MartyTargetTestPrep GMATGuruNY Cr experts When we say economicall sound , who's perspective are we taking here and why? Govt or contractor? If its contractor then C makes sense. But not clear how to choose here.
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Elite097 wrote:
MartyTargetTestPrep GMATGuruNY Cr experts When we say economicall sound , who's perspective are we taking here and why? Govt or contractor? If its contractor then C makes sense. But not clear how to choose here.

In this context, "economically sound" doesn't mean "economically viable" or "profitable." Rather, since the question is about a "method" of calculation, "economically sound" means "economically logical" or "economically valid."

Further, notice that the first sentence of the passage says that the method is used in determining "the price price the government pays." So, it appears that the question is asking about the method from the perspective of the government, though I agree that it's not 100 percent clear from whose perspective the practice would not be sound.

At the same time, we don't need to be certain about whose perspective we're talking about. since only (A) works.

(C) does not work since (C) conflicts with what the passage says.

The passage says that the contractual price is based on the current rate of inflation and the previous year’s contractual price. In that case, we have no reason to believe and have reason not to believe that, as (C) says, "the contractual price will be greatly affected by the cost of materials used for the products." After all, using such a method, the parties will not take into account the cost of materials.

So, (C) is out, and the only possible answer is (A).
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