Manufacturers have to do more than build large manufacturing

Question

Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.

The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.   1 
 1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at minimum efficient scale
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

2 
 2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated.
B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.
C. They are the primary factor that determines whether a manufacturer will realize economies of scale.
D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors.
E. They are not affected by fluctuations in a manufacturing plant’s throughput.

3 
 3. In the context of the passage as a whole, the second paragraph serves primarily to

A. provide an example to support the argument presented in the first paragraph
B. evaluate various strategies discussed in the first paragraph
C. introduce evidence that undermines the argument presented in the first paragraph
D. anticipate possible objections to the argument presented in the first paragraph
E. demonstrate the potential dangers of a commonly used strategy

4 
 4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

A. a mistake in judgment regarding the selection of a wholesaler
B. a breakdown in the factory's machinery
C. a labor dispute on the factory floor
D. an increase in the cost per unit of output
E. a drop in the efficiency of the sales network

5 
 5. The primary purpose of the passage is to

A. point out the importance of intangible capital for realizing economies of scale in manufacturing
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

OG 2019 ID's
RC00121-01
RC00121-02
RC00121-03
RC00121-05
RC00121-07

BillyZ · Accepted Answer

4. The passage  LEAST  supports the  inference  that a manufacturer's throughput could be adversely affected by

A. a mistake in judgment regarding the selection of a wholesaler 
B. a breakdown in the factory's machinery
C. a labor dispute on the factory floor
D. an increase in the cost per unit of output
 E. a drop in the efficiency of the sales network

TRICKY 
Passage: Economies of Scale
Question: Infer LEAST

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

This question is unusual. The word  inference  points to an  Inference  question, but the word  LEAST  turns the question around. Try reading it this way: What does the passage imply could adversely affect throughput? Four of the answers (the wrong ones) are things that could adversely affect throughput. The  correct answer  is something that  would NOT adversely affect throughput  (or would be  least likely  to  adversely affect throughput ).

Step 2: Find the Support

Throughput is discussed in the first paragraph. Read a couple of sentences to remind yourself about this concept.

“The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers.”

Step 3: Predict an Answer

Because the four incorrect answers will be in the passage, you may need to work backwards to some extent on this one (from the answer choices to the passage). To start, though, throughput requires careful coordination of the flow of goods (so you can infer that not having this coordination would adversely affect throughput). In addition, throughput requires careful coordination of the flow of input from suppliers and output to wholesalers and consumers. Again, you can infer that not having this coordination would adversely affect throughput.
Check the answers to see what you can cross off so far.

Step 4: Eliminate and Find a Match

You can eliminate answer  (A)  and possibly  (E)  via an initial scan based on the predicted answer above. For the other three choices, work backwards: check them against the rest of the paragraph.

(A)  Throughput can be adversely affected by issues related to  wholesalers .  Eliminate this choice .
 (B)  This choice wasn’t addressed by the first part, so scan lower in the paragraph to find a match. Bingo! Line 21 mentions that production can decline due to  problems on the factory floor ; a  breakdown of machinery  is a  problem .  Eliminate this choice .
 (C)  This choice wasn’t addressed by the first part, so scan lower in the paragraph to find a match. Bingo! Line 21 mentions that production can decline due to problems on the factory floor; a labor dispute is a problem.  Eliminate this choice .
 (D) CORRECT . This is  so tricky ! The passage says that “ If throughput falls below a critical point, unit costs rise sharply and profits disappear .” This statement seems to support the idea that unit costs would affect throughput—but be careful about the direction of that relationship. If throughput falls a great deal, then unit costs will go up sharply, yes. But  if unit costs go up , that does  NOT  necessarily mean  throughput will fall ; it could stay the same or increase. In addition, notice the difference in scope: the passage addresses a sharp increase in costs. The answer mentions only  an increase .  If the unit cost goes up by a tiny amount, nothing else may be affected in the slightest .
 (E)  The  sales network  could be considered  part of the company to wholesaler relationship , so  eliminate this choice . Alternatively,  line 22  states that  production can decline due to inefficient sales networks .

BillyZ · Answer

3. In the context of the passage as a whole, the  second paragraph serves primarily to

A. provide an example to support the argument presented in the first paragraph
B. evaluate various strategies discussed in the first paragraph
C. introduce evidence that undermines the argument presented in the first paragraph
D. anticipate possible objections to the argument presented in the first paragraph
E. demonstrate the potential dangers of a commonly used strategy

Passage: Economies of Scale
Question: Second Paragraph

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The words  second paragraph serves primarily to  in the question stem indicate that this is a  Paragraph  question. What purpose does paragraph 2 serve in the context of the entire passage.

Step 2: Find the Support

On  Paragraph  questions, your task is two-fold:  articulate the main idea  or purpose of the specific paragraph and  compare that to the overall main idea of the entire passage . Often, the first sentence of two of the specific paragraph will tell you the purpose of that paragraph in the context of the whole passage.

The opening sentence of the second paragraph is as follows:

“ The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital‐intensive manufacturing industries .”

Step 3: Predict an Answer

The entire passage is about the idea that intangible capital—not just tangible—is an important part of achieving economies of scale in manufacturing businesses.
The first sentence of the second paragraph indicates that the author has already established (in the previous paragraph) that it is important to invest in intangible capital. Now, in paragraph two, the author is going to provide a particular example that will serve to back up her claim.

Step 4: Eliminate and Find a Match

(A) CORRECT . This matches the predicted answer exactly.
(B) The second paragraph provides a specific example of the overall phenomenon; it does not evaluate various strategies presented earlier.
(C) This choice contradicts the passage. The second paragraph supports the first paragraph.
(D) This choice does not go along with the passage. The second paragraph provides an example in support of the first paragraph; it does not address possible objections.
(E) While the second paragraph does mention a danger for companies entering an already-established market with dominant players in place, this is not the main purpose of the paragraph. Rather, the focus of the paragraph is on the advantages that can be gained if a company does invest in intangible capital.

BillyZ · Answer

1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at  minimum efficient scale 
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

Passage: Economies of Scale

Question: Infer Advantage

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word  suggests  in the question stem indicates that this is an  Inference  question. Specifically, what can you infer regarding what a manufacturer must do in order to gain a  decisive advantage ?

Step 2: Find the Support

Overall, the correct question should go along with the main idea that it is important to invest in intangible capital, not just tangible capital (in which everyone already invests).

Where does the author talk about competitive advantage? Primarily in paragraph two:

“Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter.”

It isn’t necessary to be the first to build a plant, but it is important to be one of the first to maximize the full potential of a plant. What is the full potential? It has to do with maximizing economies of scale. From paragraph one:

“ ... costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market.”

Step 3: Predict an Answer

It’s crucial, then, to be among the first to figure out how to achieve economies of scale (aka, minimum efficient scale). If so, then you may be able to dominate the market.

Step 4: Eliminate and Find a Match

(A) This choice may be tempting because it copies language from the passage exactly, but the underlying message contradicts the passage. The important thing is not necessarily to be the first to build up that plant; rather, it’s important to be among the first to achieve economies of scale.
(B) The first paragraph does mention fixed and sunk costs, but does not do so in the context of competitive advantage in particular.
(C)  CORRECT . This choice matches the predicted answer: the first company or companies to achieve economies of scale can dominate the market.
(D) This choice sounds great in the real world (quality must be important, right?) but the passage does not address quality as a factor in gaining competitive advantage.
(E) The first paragraph does discuss the importance of ensuring a steady flow of raw materials, but does not do so in the context of competitive advantage in particular. (And note that a steady flow is not the same thing as stockpiling.)

BillyZ · Answer

2. The passage  suggests  that which of the following is true of a manufacturer's  fixed and sunk costs ?

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated.
B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.
C. They are the primary factor that determines whether a manufacturer will realize economies of scale.
D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors.
E. They are not affected by fluctuations in a manufacturing plant’s throughput.

Passage: Economies of Scale
Question: Infer Costs

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word  suggests  in the question stem indicate that this is an  Inference  question. Specifically, what can you infer regarding a manufacturer’s fixed and sunk costs?

Step 2: Find the Support

Fixed and sunk costs were mentioned in paragraph one. In general, when you can find a precise keyword mentioned just once in the passage, start re-reading the sentence before the one in which the keyword appears.

“If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s  fixed costs  and “ sunk costs ” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks.”

Step 3: Predict an Answer

What does that mean? These costs do not decrease even if you have to slow down the assembly line for some reason. That is, you’ve already spent some money to build your plant, and certain other costs are fixed, no matter how much you produce. These fixed and sunk costs are not affected by increases or decreases in actual production.

Step 4: Eliminate and Find a Match

(A) This choice is confusing. The passage does not address how fixed and sunk costs may be determined by market conditions, however.
(B) This seems like a great real-world answer, but the passage does not claim that low costs of a certain type are very likely to lead to large profits.
(C) The passage does not say that these types of costs in particular are the primary factor responsible for achieving economies of scale. If anything, the passage implies that intangible factors are more important.
(D) While this choice sounds reasonable in the real world, competition is not mentioned in the context of fixed and sunk costs.
(E)  CORRECT . This choice matches the predicted answer: a decrease in throughput (aka, production) doesn’t affect fixed and sunk costs. That money either has already been spent or cannot be reduced (for instance, the salaries of senior management!).

BillyZ · Answer

5. The primary purpose of the passage is to

A. point out the importance of intangible capital for realizing economies of scale in manufacturing
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

Passage: Economies of Scale
Question: Primary Purpose

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.:  important 
1st to master Int. =  dominate

Step 1: Identify the Question

The words  primary purpose  in the question stem indicate that this is a  Primary Purpose , or  main idea , question.

Step 2: Find the Support & Step 3: Predict an Answer

On main idea questions, your passage map (or your understanding of the passage in general) will provide the information you need to answer the question. Briefly reiterate the simple story to yourself: the author is focused on promoting the idea that  economies of scale  rely not just on  tangible capital  but on  intangible capital  as well.

Step 4: Eliminate and Find a Match

(A) CORRECT . This matches the pre-articulated position: Intangible capital is really important to achieve economies of scale. This choice doesn’t mention tangible capital because the author presents tangible capital as something that is already known or accepted; companies already invest in tangible capital. The main point is the importance of this  other aspect that many companies overlook :  intangible capital .

(B) This choice misses the main point: building a large facility, in and of itself, is not enough. The author argues that intangible capital must come into play in order to gain a large competitive advantage.

(C) This choice is  tricky . The passage does intimate that inadequate investment in intangible capital can harm a company’s chances of success. It  does NOT , however, suggest that  investment in tangible capital  is  inadequate .

(D) This choice contradicts the main point: building a large facility, in and of itself, is not enough. The author argues that intangible capital must come into play in order to gain a large competitive advantage.

(E) This choice is  tempting . The author  does NOT argue  that large plants in general do not help achieve economies of scale, only that large plants alone are not enough. The author argues that companies must also invest in intangible factors to help achieve economies of scale. The last paragraph, in fact, outlines how a company with large plants and strong intangibles can dominate a market.

BillyZ · Answer

1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size
B. make every effort to keep fixed and sunk costs as low as possible
C. be one of the first to operate its manufacturing plants at  minimum efficient scale 
D. produce goods of higher quality than those produced by direct competitors
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials

Passage: Economies of Scale

Question: Infer Advantage

The Simple Story

Manufacturers do have to build big plants (tangible capital) to achieve economies of scale, but doing so isn’t enough. The intangible capital (knowledge, experience, etc.) is at least as important. In fact, mastering the intangibles can lead to such great economies of scale that the company develops a market-dominant position, making it very hard for other competitors to join the market.

Sample Passage Map

Here is one way to map this passage. (Note: abbreviate as desired!)

P1. Econ of scale: Yes, need large plants. Also need good throughput.
Tangible (facilities) vs. Intangible (know-how, experience)

P2. Invest in Int.: important
1st to master Int. = dominate

Step 1: Identify the Question

The word suggests in the question stem indicates that this is an Inference question. Specifically, what can you infer regarding what a manufacturer must do in order to gain a decisive advantage?

Step 2: Find the Support

Overall, the correct question should go along with the main idea that it is important to invest in intangible capital, not just tangible capital (in which everyone already invests).

Where does the author talk about competitive advantage? Primarily in paragraph two:

“ Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter .”

It isn’t necessary to be the first to build a plant, but it is important to be one of the first to maximize the full potential of a plant. What is the full potential? It has to do with maximizing economies of scale. From paragraph one:

“ ...  costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market .”

Step 3: Predict an Answer

It’s crucial, then, to be among the first to figure out how to achieve economies of scale (aka, minimum efficient scale). If so, then you may be able to dominate the market.

Step 4: Eliminate and Find a Match

(A) This choice may be tempting because it copies language from the passage exactly, but the underlying message contradicts the passage. The important thing is not necessarily to be the first to build up that plant; rather, it’s important to be among the first to achieve economies of scale.

(B) The first paragraph does mention fixed and sunk costs, but does not do so in the context of competitive advantage in particular.

(C) CORRECT. This choice matches the predicted answer: the first company or companies to achieve economies of scale can dominate the market.

(D) This choice sounds great in the real world (quality must be important, right?) but the passage does not address quality as a factor in gaining competitive advantage.

(E) The first paragraph does discuss the importance of ensuring a steady flow of raw materials, but does not do so in the context of competitive advantage in particular. (And note that a steady flow is not the same thing as stockpiling.)

shabuzen102 · Answer

Hi - 
In the bolded part of this sentence:

It is true that   as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches ???minimum efficient scale,???   where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market.

They used two "as" to denote how things happen simultaneously. When there's one "as", we try to say two things happening at once: "As I go to school, I think about lunch." But when there are two "as" like that, does that mean there are 3 things happening at once "As I go to school, I think about lunch as I look at my phone."

Is that what's happening with that sentence? It just sounds so odd and heavy to me that I'm not sure what's going on. Thanks!

GMATNinja · Answer

You're on the right track! This sentence explores three things that are interconnected and occur at roughly the same time.

AS "capacity of a manufacturing operation rises," two additional factors change:

"costs per unit of output fall" 
 AND "plant size approaches 'minimum efficient scale'"

More importantly, you can glean information about the meaning of a convoluted sentence by considering its role in the context of the passage. In this case, the author begins with an assertion: "Manufacturers have to do  more  than build large manufacturing plants to realize economies of scale."

Then he/she writes the sentence that is giving you trouble, starting with "It is true that." Broadly speaking, the rest of this sentence discusses the impact of building large manufacturing operations.

And here is the following sentence: " However,  minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained."

From this, is it clear that the  purpose  of the sentence in question is to admit that building large manufacturing plants is a  part  of realizing economies of scale. However, the the author's main point in this piece of the passage is that this is not enough -- manufacturers have to do more to fully realize economies of scale.

Understanding why the author includes a particular point, and how that point fits into the context of the passage, can be helpful in understanding a tricky sentence even if the exact wording is difficult to interpret.

I hope that helps!

PhantomAY · Answer

Create process map first:

Paragraph 1: manufacturers need more than big plant to reach EoC - steady output. Intangible assets are important too.

Paragraph 2: how to invest in intangible assets. Exploiting full potential of big plants makes it harder for late moves to compete.

And then look at all answers:

1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

A. be the first in the industry to build production facilities of theoretically optimal size  refer to process map - the passage emphasizes just building big plants is not enough 
B. make every effort to keep fixed and sunk costs as low as possible  refer to process map - if companies don't have "steady output" this is not gonna work 
C. be one of the first to operate its manufacturing plants at minimum efficient scale  operational excellence is the suggestion, correct answer 
D. produce goods of higher quality than those produced by direct competitors  this helps in reality, but "quality" is not mentioned here as a success factor 
E. stockpile raw materials at production sites in order to ensure a steady flow of such materials  this menations "steady flow" but just stockpiling is not enough and not suggested by author

2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated.  whether is underestimated is not mentioned 
B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.  you need "steady output" to realize profits 
C. They are the primary factor that determines whether a manufacturer will realize economies of scale.  they are factors but not "primary", be careful with extreme words.  
D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors.  bench-marking is not mentioned 
E. They are not affected by fluctuations in a manufacturing plant’s throughput.  correct answer, refer to "A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines"

3. In the context of the passage as a whole, the second paragraph serves primarily to 
 if you understand the tone (supporting) of 2nd paragraph, you can eliminate 4 incorrect answers very quickly 
A. provide an example to support the argument presented in the first paragraph  correct, the first paragraph mentioned "intangible" asset is very important, and the whole 2nd paragraph provides an example to test for that 
B. evaluate various strategies discussed in the first paragraph  there is no various strategies being discussed - and author didn't evaluate anything. In order to "evaluate" you need present both supporting examples and counter examples. The 2nd paragraph is just supporting 
C. introduce evidence that undermines the argument presented in the first paragraph  opposite direction "undermine" 
D. anticipate possible objections to the argument presented in the first paragraph   not possible objection is provided 
E. demonstrate the potential dangers of a commonly used strategy  no potential dangers are posed

4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

A. a mistake in judgment regarding the selection of a wholesaler  coincides with "inadequate supplies of raw materials" 
B. a breakdown in the factory's machinery  coincides with "problems on the factory floor" 
C. a labor dispute on the factory floor  coincides with "problems on the factory floor" 
D. an increase in the cost per unit of output  this is the result not the cause, the questions asks for a cause. And the increase in cost per unit produced doesn't necessarily mean throughput rate is lower 
E. a drop in the efficiency of the sales network  coincides with "inefficient sales networks"

5. The primary purpose of the passage is to 
 main idea question - as long as you get the point of EoC is achieved by both big scale and operation efficiency, you are fine here 
A. point out the importance of intangible capital for realizing economies of scale in manufacturing   correct answer - author highlights the importance of operation excellence which contributed mostly by intangible capital  
B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities  this is not enough any more 
C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital  this might be true, but not the main point. This might just be an example to support main idea 
D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early  "building big plants is not enough" 
E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale  this is true, but most importantly author wants to highlight "what's more important". If the passage stops after proving "building big plants is not enough" and didn't open the later session to discuss "operational excellence", this might be the correct answer.

Push2808 · Answer

Hi  GMATNinja

Can you please help me understand how to go about this type of passage. It took me 10 minutes to understand the passage.

Will highly appreciate your response!

GMATNinja · Answer

The best approach to RC is to have a consistent method which you can apply to any passage. As you finish each paragraph, pause to ask yourself the following questions: 1) What was the author's purpose? 2) How does this paragraph connect to the previous paragraph? Check out our  RC Guide  for more on this approach.

Also, in case it helps, here's how we'd break down the passage using our method:

Paragraph 1
  The author  tells us what is necessary for economies of scale : not only large capacity, but also steady throughput. 
 The author then  provides details  about steady throughput: particularly, it depends on intangible capital.

Paragraph 2
  The author  explains why intangible capital is important

Overall, the second paragraph develops the main idea from the first paragraph –- namely, that steady throughput/intangible capital is essential to achieve economies of scale.

I hope that helps a bit!

CrackverbalGMAT · Answer

1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

(You are being asked to infer  WHAT  a manufacturer in a capital-intensive industry must do in order to gain an advantage over competitors. Remember, you can only infer a piece of information from the content provided in the passage.

A. be the first in the industry to build production facilities of theoretically optimal size  This is a contradiction. The second line of the second paragraph says that such industries are not dominated by firms that build facilities of optimal size.

B. make every effort to keep fixed and sunk costs as low as possible  The only reference to fixed costs and sunk costs is in the first para where it has been mentioned that these costs don’t decrease when production declines. There’s no reference to these costs in connection to capital-intensive industries.

C. be one of the first to operate its manufacturing plants at minimum efficient scale   The fourth line of the 2nd paragraph says that the company that exploits the full potential of their manufacturing plant will have a decisive advantage. This can be inferred as per the definition of “minimum efficient scale” in the first paragraph.

D. produce goods of higher quality than those produced by direct competitors  The quality of the product cannot be inferred.

E. stockpile raw materials at production sites in order to ensure a steady flow of such materials  Nothing can be inferred about stockpile of raw materials.

2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

(You are being asked to make an inference about a manufacturer's fixed and sunk costs. Remember, you can only infer a piece of information from the content provided in the passage.)

A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated.  We cannot infer if it has been underestimated or not.

B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits.  All the passage says is that these costs do not decrease when production declines. From this we cannot necessarily infer that keeping these cost low will necessarily lead to a profit.

C. They are the primary factor that determines whether a manufacturer will realize economies of scale.  These costs may be one of the factors but we don’t know if these are the primary factors.

D. They should be on a par with the fixed and sunk costs of the manufacturer's competitors.  We do not know anything about the competitors.

E. They are not affected by fluctuations in a manufacturing plant's throughput.   This can be inferred. In the sentence about the manufacturer’s fixed costs and sunk costs, various fluctuations in the flow of the materials through a manufacturing plant have been mentioned. This sentence tells us that fixed and sunk costs do not decrease even if there are any fluctuation.

3. In the context of the passage as a whole, the second paragraph serves primarily to

(You are being asked to understand the flow of the content and identify the function of the second paragraph.)

A. provide an example to support the argument presented in the first paragraph   The last line of the first paragraph says that realized economies of scale are dependent on intangible capital. The second paragraph goes one to give an example to support this.

B. evaluate various strategies discussed in the first paragraph  Strategies discussed in the first paragraph have not been discussed or evaluated

C. introduce evidence that undermines the argument presented in the first paragraph  No evidence has been presented that undermines the argument.

D. anticipate possible objections to the argument presented in the first paragraph  No objections have been anticipated

E. demonstrate the potential dangers of a commonly used strategy  No dangers, potential or otherwise, have been anticipated

4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

(You are being asked to infer the one thing that  will not  adversely affect the manufacturer's throughput.)

A. a mistake in judgment regarding the selection of a wholesaler  The passage mentions that production could decline due to inadequate supplies of raw material. From this we can infer that if choosing the wrong wholesaler could adversely affect the throughput.

B. a breakdown in the factory's machinery  The passage mentions that production could decline due to problems on the factory floor. A breakdown in the factory's machinery is one such problem. This means that breakdown in the factory's machinery could adversely affect the throughput.

C. a labor dispute on the factory floor  The passage mentions that production could decline due to problems on the factory floor. A labor dispute on the factory floor is one such problem. This means that a labor dispute on the factory floor could adversely affect the throughput.

D. an increase in the cost per unit of output   The passage says that “If throughput falls below a critical point, unit costs rise sharply and profits disappear.” If throughput falls a great deal, then unit costs will go up sharply, yes. But if unit costs go up, that does not necessarily mean throughput will fall; it could stay the same or increase. This cannot be inferred.

E. a drop in the efficiency of the sales network  The passage mentions that production could decline due to inefficient sales networks. From this we can infer that a drop in the efficiency of the sales network could adversely affect the throughput.

5. The primary purpose of the passage is to

(You are being asked  why  the author has written this essay. What was the intention? Remember, the answer cannot contradict what has been mentioned in the passage. Nor can it refer to something that has not been addressed in the passage. The answer also cannot be referring to a small aspect of what was mentioned in the passage; it needs to be more holistic.)

A. point out the importance of intangible capital for realizing economies of scale in manufacturing   The author has used this passage to point out the importance of intangible capital for realizing economies of scale in manufacturing

B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities  The only reference made to gaining a competitive advantage is the mention of being the first to exploit the full potential of the manufacturing plants. So this can’t be the primary purpose.

C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital  The point made is that potential economies of sale may be based on tangible capital, but finally, realized economies of sale depend on intangible capital. There’s no talk of inadequate investment.

D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early  The passage says that the ones that dominate are the ones that are the first to exploit the potential. So this can’t be the primary purpose.

E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale  The author has mentioned that the industry that will gain advantage is not the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. But this doesn’t mean that large manufacturing plants usually do not help manufacturers achieve economies of scale. So this can’t be the primary purpose.

- Nitha Jay

Sajjad1994 · Answer

Official Explanation

1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must

Difficulty Level:   Medium

Explanation

Inference

This question asks for an inference about what a manufacturer in a capital-intensive industry must do to have an advantage over competitors making similar products. The passage addresses this question by stating that advantage accrues to those firms that are the first to exploit the full potential of optimally sized, technologically sophisticated plants. In this context, exploiting the full potential of such plants means operating them at minimum efficient scale. Based on the definition in the first paragraph, this means that the plant must have an output of such a size that the cost per unit of output is at a minimum.

A.  The passage says that for new capital-intensive firms to dominate the market, it is not enough for them to have optimally sized plants; the plants must also be operated in a way that fully exploits their potential.

B.  While keeping fixed and sunk costs low would obviously help keep overall costs low, the passage does not suggest that this is decisive in enabling a firm to have an advantage over competitors.

C.  Correct.   Being among the first manufacturers to operate plants at minimum efficient scale means that those plants are being exploited to their full potential. This strategy would most likely give such manufacturers a decisive advantage over new firms hoping to compete effectively.

D.  The passage does not discuss the quality of goods made by manufacturers.

E.  The passage does not suggest that stockpiling raw materials is the most efficient way to ensure a steady flow of raw materials into the manufacturing process, though the passage states that such a steady flow is a factor in achieving minimum efficient scale.

The correct answer is C.

Sajjad1994 · Answer

Official Explanation

2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?

Difficulty Level:   Easy

Explanation

Inference

This question asks about what the passage implies about fixed and sunk costs. The passage states that when production declines due to certain factors, such costs remain at the same level (which may be high), and the cost per unit produced (unit costs) rises sharply.

A.  The passage discusses the impact of market conditions on determining what the optimal size of a manufacturing plant is (which affects fixed and sunk costs). But it makes no claim about the frequency with which such an impact is “underestimated.”

B.  The passage emphasizes that failing to keep throughput at an efficiently high level reduces profitability because that failure results in increased cost per unit (to which, of course, the plant’s fixed and sunk costs contribute). But the passage does not claim that keeping aggregate fixed and sunk costs very low is necessary in order to have the most competitive production operation.

C.  The passage emphasizes that the crucial factor in achieving economies of scale is efficient operation of the production facilities, not the size of the firm’s fixed and sunk costs (even though such costs are clearly in part determined by the size and design of the production facilities).

D.  While a manufacturer’s fixed and sunk costs may be on a par with those of the manufacturer’s competitors, the passage provides no grounds for inferring that there is any need for them to be (for example, physical plants that employ different technologies may have different price tags).

E.  Correct.   According to the passage, “throughput” refers to the flow of materials through a plant. This flow can vary as a result of various factors, but fixed and sunk costs—financial resources already committed—remain the same regardless of such variation.

The correct answer is E.

Sajjad1994 · Answer

Official Explanation

3. In the context of the passage as a whole, the second paragraph serves primarily to

Difficulty Level:   Medium

Explanation

Evaluation

This question asks about the rhetorical function of the second paragraph. While the first paragraph argues that a crucial factor in achieving economies of scale is intangible capital, or organized human capabilities, the second paragraph uses the example of new capital-intensive manufacturing industries to help show that this is indeed the case.

A.  Correct.   The second paragraph provides an example that illustrates the claims made in the first paragraph. It discusses the way in which intangible capital—e.g., distribution networks, marketing systems, smooth production processes, and qualified management teams—enables manufacturers in new capital-intensive manufacturing industries to realize economies of scale and achieve market dominance.

B.  The second paragraph does, in a sense,  “evaluate”  investment in intangible capital: it suggests that such investment is necessary. However, investment in intangible capital is the only strategy it discusses.

C.  The second paragraph supports rather than undermines the first paragraph’s argument.D. Nothing in the second paragraph suggests that there are, or could be, any objections to the first paragraph’s argument.

E.  The second paragraph discusses the potential positive outcomes of investing in intangible capital. It suggests that there might be negative consequences to not making such investments, but it does not indicate that avoiding such investments is a commonly used strategy.

The correct answer is A.

Sajjad1994 · Answer

Official Explanation

4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by

Difficulty Level:   Hard

Explanation

Application

This question may be best approached by using an elimination strategy—first finding the four choices that can reasonably be inferred from the passage, and then checking to make sure that the remaining choice cannot reasonably be inferred. This requires understanding the information the passage gives about throughput, then making inferences about what can cause throughput to drop. The passage defines throughput generally as the flow of materials through a plant and goes on to explain that it involves coordination of the production process itself, as well as obtaining materials from suppliers and marketing and distributing the manufactured products. Anything that damages this flow of materials and products would be said to have an adverse effect on throughput.

A.  Making a poor judgment about a wholesaler would most likely have an adverse effect on throughput, in that it could affect the flow of output to wholesalers and final consumers.

B.  A breakdown in machinery would likely fall into the category of problems on the factory floor mentioned in the passage and would likely prove damaging to throughput because of its effect on the production process itself.

C.  A labor dispute would also likely fall into the category of problems on the factory floor mentioned in the passage and would probably cause a decline in production and thus adversely affect throughput.

D.  Correct.   The passage emphasizes that changes in throughput can cause increases or decreases in costs per unit. But the passage is not committed to any claims about how changes in costs per unit might affect throughput.

E.  The passage suggests that inefficient sales networks could cause a decline in production. Thus a decrease in sales efficiency would most likely adversely affect a manufacturer’s ability to provide goods to consumers, and thus would create problems with throughput.

The correct answer is D.

Sajjad1994 · Answer

Official Explanation

5. The primary purpose of the passage is to

Difficulty Level:   Medium to Hard

Explanation

Main idea

This question depends on understanding the passage as a whole. In general, it makes an argument for investing in intangible capital as a way for manufacturers to realize economies of scale, and it supports its argument with an example.

A.  Correct.   The passage focuses on intangible capital as a crucial factor in realizing economies of scale.

B.  According to the passage, manufacturers gain competitive advantage by building plants of optimal size that they then fully exploit; nothing in the passage suggests that large plants are frequently optimal.

C.  The passage assumes that manufacturers invest appropriately in tangible capital and argues that it is important for them to invest in intangible capital as well.

D.  The passage states that new capital-intensive manufacturing industries are dominated not by firms that are the first to build large plants, but by firms that exploit the full potential of their plants.

E.  The passage indicates that economies of scale can be achieved in plants of optimal size. The passage does not suggest that large plants cannot be optimal.

The correct answer is A.

ag153 · Answer

Really do not understand Q5 Choice E.

MartyTargetTestPrep  pls answer it the TTP way. Really struggling with E. I think the whole passage is an answer to the "why" in E. I am not sure why passage 2 will not fit into this "why". Moreover, the passage is saying why the large plants wont lead to economies of scale and the reason is their lack of focus on intangible. I rejected A and was confused b/w C and E before choosing E

MartyTargetTestPrep · Answer

Hi ag153.

Question 5  choice (E) is a trap choice that SEEMS to be supported by the passage but actually goes in a direction different from what the passage says.

To see why (E) is not correct, we can carefully compare what the passage says with what (E) says.

The first sentence of the passage says the following:

"Manufacturers have to do more than build large manufacturing plants to realize economies of scale."

Then, continuing to read the passage, we see that the remainder of the passage to a large degree expands on what the first sentence says and adds the idea that, for realizing economies of scale, something else is needed in addition to large manufacturing plants. That something else is intangible capital.

So, what is the point of the passage? It's that, while manufacturing plants are necessary for realizing economies of scale, they are not sufficient for realizing economies of scale. So, "Manufacturers have to do more": they have to invest in intangible capital.

Now, let's look at question 5 choice (E).

(E) explain why large manufacturing plants usually do not help manufacturers achieve economies of scale

Notice that what choice (E) says is quite different from what the passage says. Whereas the point of the passage is that manufacturing plants ARE NECESSARY BUT NOT SUFFICIENT for realizing economies of scale, choice (E) is saying that the point of the passage is that manufacturing plants DON"T HELP AT ALL with realizing economies of scale. So, whereas the direction of what the passage says is that the plants have a role in achieving economies of scale, choice (E) is saying that the point is that the plants have no such role.

Thus, choice (E) is clearly incorrect.

Now, let's consider choice (A).

(A) point out the importance of intangible capital for realizing economies of scale in manufacturing

While there's more we could do to support choice (A), what we have discussed here indicates that choice (A) accurately describes the primary purpose of the passage.

The correct answer is (A).

Manufacturers have to do more than build large manufacturing

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Manufacturers have to do more than build large manufacturing

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