A United States manufacturer of farm equipment reported a 1988 third

Question

A United States manufacturer of farm equipment reported a 1988 third-quarter net income of $32 million, compared with $25.5 million in the third quarter of 1987. This increase was realized despite a drop in United States retail sales of farm equipment toward the end of the third quarter of 1988 as a result of a drought.

Which of the following, if true, would contribute most to an explanation of the increase in the manufacturer’s net income?

(A) During the third quarter of 1988, the manufacturer announced that it would add irrigation systems to its line of products.

(B) In the third quarter of 1988, the manufacturer paid no wages during a six-week strike, but stocks on hand were adequate to supply dealers.

(C) Sales in the United States of farm equipment made and sold by foreign companies were higher in the third quarter of 1988 than in any previous quarter.

(D) Official dealers of the manufacturer had low supplies of farm equipment during the third quarter of 1988.

(E) Eligible United States farmers benefited from a federal drought-relief fund late in the third quarter of 1988

kyatin · Accepted Answer

B.

Net Income = Revenue - cost (labor+material+whatever)

by reducing cost net income would go up.

Drop in the sales is mentioned but for all nation not for this manufacturer in particular.

What is OA?

abhishekdadarwal2009 · Answer

A United States manufacturer of farm equipment reported a 1988 third-quarter net income of $32 million, compared with $25.5 million in the third quarter of 1987. This increase was realized despite a drop in United States retail sales of farm equipment toward the end of the third quarter of 1988 as a result of a drought.

Which of the following, if true, would contribute most to an explanation of the increase in the manufacturer's net income?

(A) During the third quarter of 1988, the manufacturer announced that it would add irrigation systems to its line of products.
 the announcement would have not impacted the net income so out of scope 
(B) In the third quarter of 1988, the manufacturer paid no wages during a six-week strike, but stocks on hand were adequate to supply dealers.
 Correct and the most suitable answer among the answer choices. 
(C) Sales in the United Sates of farm equipment made and sold by foreign companies were higher in the third quarter of 1988 than in any previous quarter.
 the choice gives an opposite explaination ie the income would have been lessened rather than increased if this was true. 
(D) Official dealers of the manufacturer equipment had low supplies of farm equipment during the third quarter of 1988.
 out of scope,or very less impact 
(E) Eligible United Sates farmers benefited from a federal drought-relief fund late in the third quarter of 1988.
 Speaks about the farmers rather than the manufacturer,thus Out of scope

RussianDude · Answer

you can boil it down to A & B

Answ. A does not provide any information on when exactly the irrigation system would be added. Hence, A does not resolve the paradox.

pkshankar · Answer

Great question with 2 close contenders but as always there can be just 1 answer. The author here assumes that a drop in the retail sales of farm equipment for the whole economy necessarily means a drop in retail sales for the manufacturer in question. That is not necessarily true. The manufacturer might be doing exceptionally good or doing decently good just to stay afloat but the economy on the whole might be bearing the brunt of of a drought. Although this might seem unreasonable let me cite an example: what if this manufacturer produces farm equipments and exports them and does not sell them domestically, then in that case local conditions will not be applicable to the manufacturer in question.
Now let us just walk through the 2 close contenders and pick the right one:
A - this just says that the manufacturer has announced something which in all likelihood will address the drought issue. We have no reason to believe that the manufacturer will indeed walk the talk and if he does then will it really force the people to buy farm equipment.

B - on the other hand says that the manufacturer will withhold the wages of workers for 6 weeks, and this act will directly reduce his costs which will in turn drive his revenue up. Hence this is the one which will fetch us points.

Skywalker18 · Answer

A United States manufacturer of farm equipment reported a 1988 third-quarter net income of $32 million, compared with $25.5 million in the third quarter of 1987. This increase was realized despite a drop in United States retail sales of farm equipment toward the end of the third quarter of 1988 as a result of a drought.

Income = Revenue - Expenses
The sales decreased towards the end of the third quarter, but income increased

Which of the following, if true, would contribute most to an explanation of the increase in the manufacturer’s net income?

(A) During the third quarter of 1988, the manufacturer announced that it would add irrigation systems to its line of products. - Incorrect - a mere announcement will not lead to an increase in net income

(B) In the third quarter of 1988, the manufacturer paid no wages during a six-week strike, but stocks on hand were adequate to supply dealers. - Correct -- so the expenses reduced, leading to an increase in net income

(C) Sales in the United States of farm equipment made and sold by foreign companies were higher in the third quarter of 1988 than in any previous quarter. - Irrelevant

(D) Official dealers of the manufacturer had low supplies of farm equipment during the third quarter of 1988. - Irrelevant

(E) Eligible United States farmers benefited from a federal drought-relief fund late in the third quarter of 1988 - Irrelevant

Answer B

AdityaHongunti · Answer

A United States manufacturer of farm equipment reported a 1988 third-quarter net income of $32 million, compared with $25.5 million in the third quarter of 1987. This increase was realized despite a drop in United States retail sales of farm equipment toward the end of the third quarter of 1988 as a result of a drought.

(B) In the third quarter of 1988, the manufacturer paid no wages during a six-week strike, but stocks on hand were adequate to supply dealers.

GMATNinja   mikemcgarry   chetan2u   sayantanc2k

the difference between 2 incomes is around 6 million . which is a HUGE amount.
and ption B says wages werent paid for 6 weeks . SO are we supposed to say that the wages which werent paid for 6 weeks made up for 6 million? i mean are we supposed to accept such huge leaps?? 6 weeks of wages make up for 6 million???? though i understand that other profits may also be there. But shoudl we be satisfied with just one source of profit?

Gegeyan · Answer

That's the exactly what I thought, so I ruled out B. 
Help, please?

GMATNinja · Answer

Be careful here. Where in the passage does it say that we should consider a difference of 6 million to be a HUGE amount? Where in the passage are we told the % of total expenses that labor makes up for this particular company? What do these quantitative measurements have to do with the paradox that we're trying to resolve?

Let's stay focused on (1) understanding the logic of this paradox, (2) eliminating the choices that definitely don't resolve that paradox and (3) picking the remaining choice that contributes most to explaining that paradox.

Skywalker18  and  kyatin  did a nice job nailing down the paradox:

At the end of the day we're trying to explain why a single manufacturer's income increased during a specific time period, despite a general decline in retail sales during that same period. We're never told how big that general decline was. As  pkshankar  mentioned, we're never told how the manufacturer's sales matched up to the general trend. We're also never told anything about the manufacturer's expenses during this time.

A few folks have pointed out why A, C, D, and E can be eliminated. So to focus on your doubt, let's take one more look at (B):

Income = Revenue - Expenses. We're trying to explain how income could go up. 
  Revenue for this company  presumably  went down by some amount, but we don't know by how much. 
  Expenses  definitely  went down because the company paid  no  wages for six weeks. We don't know how big the savings were, but knowing that absolutely $0 were paid out to workers for half of the quarter is not trivial. And even if we don't have a specific figure here, knowing that a core expense of manufacturing disappeared for half the quarter goes a long way towards explaining the logical paradox. Bottom line: A key expense went down. 
  Because stocks on on hand during the strike were adequate to supply dealers, we also know that the company did not incur additional expenses specifically to make up for the lack of labor during this time.

This is enough for us to keep (B) around! It's more compelling than any other answer choices, and that is enough to satisfy what the question is asking.

I hope this helps!

sahilkak · Answer

B solves the issue of pradox here, if the manufacture did not pay wages to the emplyees, that could be reason for increase in reported earnings

A says that manufacture announced that it would add the irrigation system, but it did not help in explaining the cause how the revnues were increased

barryseal · Answer

I have a general question about the meaning of the word "sales" when it is not specified further: How do we know whether sales = #units sold or sales=revenue? Thanks!

SonalSinha803 · Answer

Sales means revenue. Sales = units sold * cost of each unit.

If they are talking about number of items, it will be clearly mentioned and will be clear from the language.

Cheers !!

Sent from my Lenovo K53a48 using  GMAT Club Forum mobile app

TathagataC · Answer

A good question indeed, Close contenders were option B & E. But when you read carefully, it says sales were low. So even if the farmers got a relief fund, as stated in option E, it didn't contribute to the revenue. Hence, option B is the correct answer.

mSKR · Answer

Hi  GMATNinja   VeritasKarishma

Actually my doubt on A vs B is:
B still would have sales . But sales have decreased. Salaries cost has decreased. Definitely some revenue might have increased

For A: it also makes sense that they had new source of income .Yes it is still an open questions whether the sales of other products were increased

In the end we have a choice:
Choose A that some revenue might have increased
Choose B that products might have been sold

please share your opinion  GMATNinja   VeritasKarishma

GMATNinja · Answer

Take another look at the exact wording of (A):
 
During the time in question, the manufacturer only announced that it  would  add some products in the future. This implies that the new products are not yet being sold, and thus would not impact revenue during 1988's Q3.

(B), on the other hand, provides a strong reason that costs decreased during that time.

(B) explains the increase in net income in the 3rd quarter of 1988, while (A) does not.

I hope that helps!

gagan0303 · Answer

Hey, here the meaning of net income is Revenue minus Expenses right?

Kratosgmat · Answer

(A) During the third quarter of 1988, the manufacturer announced that it would add irrigation systems to its line of products. - The Announcement makes no difference to net income

(B) In the third quarter of 1988, the manufacturer paid no wages during a six-week strike, but stocks on hand were adequate to supply dealers. - labor cost reduced so net income increased.
Answer is B

Raman109 · Answer

Net income = Revenue - Cost. Revenues are down, as we know, because of drought. So let's also look at cost.

Option elimination -

(A) During the third quarter of 1988, the manufacturer announced that it would add irrigation systems to its line of products. - The Announcement makes no difference to net income

(B) In the third quarter of 1988, the manufacturer paid no wages during a six-week strike, but stocks on hand were adequate to supply dealers. - labor cost reduced so net income increased.
Answer is B

(B) In the third quarter of 1988, the manufacturer paid no wages during a six-week strike, but stocks on hand were adequate to supply dealers. - it makes sense. Talks about cost.

(C) Sales in the United States of farm equipment made and sold by foreign companies were higher in the third quarter of 1988 than in any previous quarter. - This should reduce the net income and not increase it. Weaken.

(D) Official dealers of the manufacturer had low supplies of farm equipment during the third quarter of 1988. - Ok. They had low supplies; you supplied. Then what? They have to sell it to get money and transfer that money to the manufacturer. Right? But it's a draught time. Sales are low, and even if they helped recover the stocks, we don't know if the dealer could sell that stock. Most probably, no, as there is a draught.

(E) Eligible United States farmers benefited from a federal drought-relief fund late in the third quarter of 1988 - farmers are out of scope.

sonuch · Answer

Cannot be A because premise mentions that the farm equipment sale was decreased in 1988. A says that irrigation system was added which itself could be farm equipment. Even after adding the irrigation system, premise mentions that retails sales had decreased. this does not explain the increase in revenue.

A United States manufacturer of farm equipment reported a 1988 third

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A United States manufacturer of farm equipment reported a 1988 third

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