Because competition has dramatically lowered margins in the industry,

Question

Because competition has dramatically lowered margins in the industry, Euroquest must reduce personnel expenditures by at least 15% over the next year in order to remain solvent. In order to do so, Euroquest would have to cut entire divisions and benefits programs such that it would reduce personnel expenditures by a full 25% over the next year.
 
Which of the following can be logically inferred from the information above?

A. Euroquest reduces personnel expenditures by 25% over the next year it will remain solvent.

B. If Euroquest cannot reduce personnel expenditures by 25% over the next year it will not remain solvent.

C. Euroquest is unable to charge as much for its products as it was a year ago.

D. Euroquest competitors earn a higher return on investment for personnel expenditures than Euroquest does.

E. Some of Euroquest competitors will also have to significantly reduce personnel expenditures in order to remain solvent.

mikemcgarry · Accepted Answer

Dear  bkpolymers1617 ,

I'm happy to respond. :-)

This question is particularly brilliant--it's almost at the LSAT LR level. My only criticism is that it might be a notch too hard for the GMAT. Nevertheless, it is a wonderful question. Many Veritas questions are very good.

The argument has a clever and sneaky jump in the middle. First we get: 
 Because competition has dramatically lowered margins in the industry, Euroquest must reduce personnel expenditures by at least 15% over the next year in order to remain solvent. 
Reducing the personnel expenditures by less than 15% definitely is not going to cut it. Maybe 15% will be enough, or maybe deeper cuts will be requires. 
Then we get a funny leap: 
 In order to do so, Euroquest would have to cut entire divisions and benefits programs such that it would reduce personnel expenditures by a full 25% over the next year. 
The implication is that, for whatever reason, it seems that there is no possibility of small cuts. For example, it might not be possible to give employees "partial health insurance"--either you give it to them, or you don't. Thus, of all the things available to cut, it appears that the smallest is worth 25%. That's the smallest cut that would " reduce personnel expenditures by at least 15% ." Would this be enough to keep the company solvent?

This is a funny thing about the business world, and it highlights why it's very important to have an understanding of the business world for the GMAT. What happens when a company starts to tank? Sometimes, adjusting expenditures is enough to keep it afloat and it soon returns to a profitable state. Sometimes, the drop in revenue is due to the wild success of a competitor, and the company's revenue will continue to plummet further as this other company makes gains. Sometimes, the loss of revenue is due to a very poor product or a scandal of some kind, and sometimes a spate of lawsuits complicates the struggling company's position, dragging it further down. Sometimes, a company has the bad fortune of going into a struggling period just before the entire economy goes into a recession, where struggling companies are the first to crash. Thus, will reducing personnel expenditures by 25% guarantee the survival of the company? No. It's  necessary , but not  sufficient , for survival.

Now, let's look at (A) & (B). 
 A. Euroquest reduces personnel expenditures by 25% over the next year it will remain solvent. 
This answer is a huge trap for people who don't appreciate the dynamic nature of the modern business world. Reducing the personnel expenditures by 25% is necessary for survival--without doing this, they definitely will not remain solvent. On the other hand, this is not sufficient for survival: doing this may or may not guarantee that they will keep their doors open. Thus, this is not a clear and certain implication.

B. If Euroquest cannot reduce personnel expenditures by 25% over the next year it will not remain solvent. 
Yes! This captures the correct logical relationship. It is absolutely necessary for Euroquest to make these 25% cuts. We don't know whether doing this will be enough, but it can't get away with not doing this.

Does all this make sense?
Mike :-)

abhimahna · Answer

Okay, I solved this question after a couple of days now and realized my mistake.

The argument is saying two things:

1. To remain solvent, you need to reduce expenditure by atleast 15%.

2. To meet point 1, you need to cut some benefits by 25%.

That means if I donot reduce my benefits by 25%, I wont be able to meet my point 1. If I donot meet my point 1 , I will not be able to remain solvent.

Hence, B is a clear winner here.

rekhabishop  , here is the catch. I am saying To do X, I need to Y. But it doesn't mean if I do Y, I will do X as well.

It's like

If P, then Q. But notice that If Q doesn't guarantee P. Hence, A is out without a second thought.

Does that make sense?

P.S: Thanks for tagging me in. I am able to do this question 2nd time very easily. First time, I didnt realize my mistake at all.

TaN1213 · Answer

Edit: I had difficulty in buying the explanation provided for the correct answer. Would like to request Veritas / VeritasPrepkarishma to provide me with an overt explanation.
Explanation provided : 
"In an Inference problem, the right answer must be true, meaning that you can use process of elimination to rule out any answers that could be false.

Here A is a prime candidate to be eliminated. You know from the stimulus that Euroquest must cut personnel expenses by 15% in order to remain solvent, but does that mean that if it does so it will definitely remain solvent? Process of elimination for "could be false" includes hypothetical situations: what if Euroquest was hit with a massive lawsuit, or its offices were destroyed by a flood and it couldn't afford to rebuild?

Choice B must be true, and can be proven by what is known in formal logic as the contrapositive. If reducing these expenses by 25% is a necessary requirement for staying solvent, then if the company does not meet that requirement you know that it cannot remain solvent.

Choice C can also be eliminated via a hypothetical situation. Sure, it may be that the competition referenced in the argument is driving costs down, but what if Euroquest is in a resources-starved industry - say its primary ingredient is enriched uranium - and competition is driving up the price of raw materials. That would be consistent with the facts but violate the conclusion, so choice C can be eliminated.

Choices D and E are related to each other, each drawing a conclusion about how Euroquest's competitors are faring with regard to personnel expenses. You cannot draw a conclusion about the competition without any further information about those companies. D may be incorrect because, while Euroquest may need to cut expenses by 15%, its competitors may be so inefficient that they have to cut by 40 or 50%. And E may be incorrect because of the converse: Euroquest is the inefficient one, and everyone else can simply stay the course. You just don't know, so D and E are incorrect. Choice B is the correct answer. "

abhimahna · Answer

Hello Experts,

Need your help here:

I donot agree with OA.

We are given in order to remain solvent, it has to cut atleast 15%.

Now, B is saying if it cannot cut atleast 25%, it will not remain solvent.

What if it cuts 20%. As per the premise, it can still remain solvent.

Hence, B cannot be the correct answer.

Including B, all the options cannot be inferred. There is something wrong with the question.

Please confirm.

broall · Answer

I think that the argument like this way:

Because competition has dramatically lowered margins in the industry, Euroquest must reduce personnel expenditures by at least 15% over the next year in order to remain solvent.  (OK, then Euroquest must reduce PE by at least 15%...)

In order to do so  (reduce PE by at least 15%) , 
Euroquest would have to cut entire divisions and benefits programs  (mean that Euroquest must do those things to reduce PE by at least 15% or reduce nothing)  
such that it would reduce personnel expenditures by a full 25% over the next year  (those things have some side-effects that make Euroquest could reduce PE by up to 25%. On the other hand, this means that Euroquest must apply those things to reduce PE by 25% or nothing would change)

roadrunner · Answer

reduce personnel expenditure by 25% == necessary condition
remain solvent = sufficient

In other words, if Euroquest remained solvent then it must have met necessary condition (reduce expenses by 25%)

reducing expenses is a necessary condition, not sufficient i.e. there could be other factors at play here

Not(necessary) --> not (sufficient)
Thus, not reducing expenses guarantees default. Ans. B

Nunuboy1994 · Answer

Guys what the stimulus is basically telling us is that the only way Euroquest can reduce personnel expenditures is by cutting entire divisions and benefits programs- this is the only way to sufficiently reduce personal expenditures; however, in doing so it ends up reducing personal expenditures more then it wants to. There is no other option where Euroquest can manage cuts so as to reduce personnel expenditures by only 15 percent. If Euroquest's only method of reducing personnel expenditures by at least 15 % is a method that causes a 25% reduction then unless they make that reduction they cannot remain solvent.

B

rekhabishop · Answer

abhimahna  please help us out with this question. 
I am not very convinced with OA. Shouldn't the answer be A? :(

bkpolymers1617 · Answer

mikemcgarry  - hey Mike , can you show some path to us, I chose option A, just like the majority of folks. Can you provide some expertise please. Thanks

bkpolymers1617 · Answer

Dear Mike- First of all the post is just brilliant. I always admire the way you reciprocate to students' problems. Your posts are the most comprehensive of the lot. Always to the point and well articulated. Indeed, this one was a tough one. I learnt something very important through this question. Please correct me if you feel I am still on the wrong track.

If a statement says something like this-  Mr. A should study at least 1000 hours to excel on the GMAT.

Then we can infer the following from this statement-
1. Studying for 1500 Hours will not guarantee Mr. A success on the GMAT. (Again, it might be possible that Mr. A is a laggard and needs to supplement his prep with additional practice despite studying for 1000 hours.)- So again, the statement that "Studying 1500 hours would guarantee success on the GMAT would fall short)
2. Mr A studied for 750 hours, so would not be successful on the GMAT.
(Now, this means that if he does not follow the prerequisite of studying at least 1000 hours, then he is definitely not going to succeed on the GMAT.)

Now, similarly in the above question, reducing personal expenditure was just one of the prerequisites for attaining solvency. However, it was not a guarantee that such a reduction was itself assure solvency. But again, not adhering to the prerequisite that happens to be 25% in this case would definitely not help in the solvency process.(as you mentioned that the company might not be able to cut social costs could partially and hence company's relevant figure might would be 25% instead of 15%)

SO MOVING FORWARD, I LL ENSURE THAT I AM LOOKING FOR CONTRAPOSTIVES CLEARLY. Thanks so much Mike :)

mikemcgarry · Answer

Dear bkpolymers1617 , I'm happy to respond. Yes, with your statement about " Mr. A ," you have drawn the correct conclusions. Mike

VKat · Answer

Expert,

Kindly explain,
Argument conclusion: If A then B
Inference: If not A, then not B.

Is it correct?

mikemcgarry · Answer

Dear VKat I'm happy to respond.

My friend, that's a classic logic mistake, not a proper inference. Think about it. If an animal is a horse, then it is a mammal . = true If an animal is not a horse, then it is not a mammal . = false (it could be a dog) If a shape is a triangle, then it is a polygon . = true If a shape is not a triangle, then it is not a polygon . = false (it could be a pentagon) If I am in New York City, then I am in the USA . = true If I am not in New York City, then I am not in the USA . = false (I could be in Chicago) If the argument's conclusion is If A, then B . Then the following two are not valid conclusions If not A, then not B (the inverse ) If B, then A (the converse ) But this transformation is a proper inference: If not B, then not A . (the contrapositive ) It's a textbook logical mistake to start with an if-then statement and infer either the converse or the inverse. The GMAT will not ask you about these terms and will not test this stuff directly, but you need to understand not to fall into these errors. Does all this make sense? Mike

VKat · Answer

Ya mike,
I got your point.
And i have also gone through the explanation which you have provided just above this post.
But i took a different route to solve this problem.

For me, A : If Euroquest cut expenditure by atleast 25%
B : it will remain solvent.

So as per your explanation, if not A, then not B is a wrong inference.
So how option B is correct which states that, If Euroquest cannot reduce its expenditure by atleast 25%, it will not remain solvent.

I hope you understood my point.

mikemcgarry · Answer

Dear VKat , I'm happy to respond.

My friend, part of the problem here is that you translated a sentence in the prompt to an incorrect if-then statement. The prompt said: . . . Euroquest must reduce personnel expenditures by at least 15% over the next year in order to remain solvent . This does NOT translate to If Euroquest reduces personnel expenditures by at least 15% over the next year, then it will remain solvent . That is a complete logical distortion of the original statement. Consider these general statements: A must be true in order for B to be true . A is necessary for B . These translate to If B is true, then A is true . Here, if we were going to translate the prompt sentence to an if-then form (not necessarily the best strategy!), the best translation would be something of this sort: If Euroquest remains solvent over the next year, then it has reduced its personnel expenditures by at least 15% over that same period . The contrapositive of this is: If Euroquest does not reduce personnel expenditures by at least 15% over the next year, then it will not remain solvent . Both of those statements have the same truth-content as the statement in the prompt. Does all this make sense? Mike

Prateek176 · Answer

abhimahna 
If my understanding is correct then, you have arrived at option B using the following reasoning

Acc to Option A: If I am  able  to reduce expenses by 25% then it's not necessary that I can avoid insolvency. It may happen or it may not happen
Acc to option B: If I am  not able  to reduce expenses by 25% then I definitely can't save myself from becoming insolvent

but I have another question. What if I reduce expenses by a value between 15-25%. Wont B fall apart as well?

abhimahna · Answer

Hey  prateek176  ,

Actually No.

See the argument itself is saying we need to reduce expenses by 25%. This doesn't open the doors for negotiation. So, if you are saying between 15 and 24.99%, it means you are not meeting the criteria of the argument itself.

Hence, B will fall apart only when the argument itself is saying so.

Does that make sense?

Doer01 · Answer

Correct choice B

Thought process:
Necessary reduction to remain solvent — at least 15%
What Euroquest can do — 25%
How? Cut entire divisions and benefits programs. 
Could it do partial? Not given.
 So, only possible way to remain solvent is 25%. Hence Option B.

Bunuel · Answer

VERITAS PREP OFFICIAL EXPLANATION:

In an Inference problem, the right answer must be true, meaning that you can use process of elimination to rule out any answers that could be false.

Here A is a prime candidate to be eliminated. You know from the stimulus that Euroquest must cut personnel expenses by 15% in order to remain solvent, but does that mean that if it does so it will definitely remain solvent? Process of elimination for "could be false" includes hypothetical situations: what if Euroquest was hit with a massive lawsuit, or its offices were destroyed by a flood and it couldn't afford to rebuild?

Choice B must be true, and can be proven by what is known in formal logic as the contrapositive. If reducing these expenses by 25% is a necessary requirement for staying solvent, then if the company does not meet that requirement you know that it cannot remain solvent.

Choice C can also be eliminated via a hypothetical situation. Sure, it may be that the competition referenced in the argument is driving costs down, but what if Euroquest is in a resources-starved industry - say its primary ingredient is enriched uranium - and competition is driving up the price of raw materials. That would be consistent with the facts but violate the conclusion, so choice C can be eliminated.

Choices D and E are related to each other, each drawing a conclusion about how Euroquest's competitors are faring with regard to personnel expenses. You cannot draw a conclusion about the competition without any further information about those companies. D may be incorrect because, while Euroquest may need to cut expenses by 15%, its competitors may be so inefficient that they have to cut by 40 or 50%. And E may be incorrect because of the converse: Euroquest is the inefficient one, and everyone else can simply stay the course. You just don't know, so D and E are incorrect.  Choice B is the correct answer.

Because competition has dramatically lowered margins in the industry,

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