One name-brand cereal manufacturer is about to reduce wholesale prices

Question

Which of the following logically completes the passage below ?

One name-brand cereal manufacturer is about to reduce wholesale prices for its cereals by 20% because consumers have been switching from its cereals to cheaper store brands. The success of this strategy relies on the assumption that supermarkets will pass on all of the savings by lowering the prices they charge consumers for the manufacturers' cereals. Although supermarkets usually pass on such savings, in this case it is likely that supermarkets will not do so because ________.

(A) Several other name-brand cereal manufacturers are about to reduce the wholesale prices of their cereals

(B) The average price per box of name-band cereals has significantly increases over the past 10 years.

(C) Total annual sales of cereal—including both name-brand and store-brand cereals—have increased over the past 10 years.

(D) Supermarkets currently make far more profit on sales of store-brand cereals than on sales of name-brand cereals.

(E) The current prices of manufacturers' cereals are comparable to the prices of name-brand cereals produced by other cereal manufacturers.

ID 00875

Vineetk · Accepted Answer

a) Several other name-brand cereal manufacturers are about to reduce the wholesale prices of their cereals:  Incorrect. Even if other brand name manufacturers reduce the price, there is no reason why store cannot pass the saving. 
b) the average price per box of name-band cereals has significantly increases over the past 10 years:  Incorrect. This will impact the manufacturer not the stores. So, irrelevant. 
c) total annual sales of cereal - including both name-brand and store-brand cereals -have increased over the past 10 years:  Incorrect. Even if the sales increased, there is no reason why store cannot pass the saving. 
d) supermarkets currently make far more profit on sales of store-brand cereals than on sales of name-brand cereals:  Correct. If the store is earning more profit on sales of their brand why will they want to lose sale and earn less profit. 
e) the current prices of manufacturers' cereals are comparable to the prices of name-brand cereals produced by other cereal manufacturers:  Incorrect. Comparison of brand to other brand is irrelevant, let's keep it to manufacturers' brand vs stores' brand. Irrelevant.

ankit0411 · Answer

Can you explain what it exactly means when it says "pass on the savings to consumers" ? That is what is actually confusing me.

Vineetk · Answer

This means that whenever store receives any discounts from manufacturer, it passes it to the customer but in this case it will not. The manufacturer is not reducing the price on MRP but on wholesale prices. While store is now getting the product at 20% lower price, it will not give discount to the customer (i.e. will still sell at MRP).

PrashantPonde · Answer

In this plan, manufacturer is planning to sell the product store at reduced wholesale price expecting that it will "Pass on" this reduced price to end customer.

For example:
 Current situation: 
 Wholesale price to store:  $8 , Manufacturer Product:  MRP- $12 
Store Product: MRP- $10
In this case consumer is switching to Store brand as its cheaper (by $2)

Proposed situation:
 Wholesale price to store:  $6 (note 20% reduction),   Manufacturer Product: MRP- $12, Expected Discounted consumer price:  $10  
Store Product: MRP- $10

Explanation: 
In this case the manufacturer assumes that the store will sell manufacturer's product at discounted price down to $10 from $12  (i.e. will "pass on these savings" to consumer)   With both the products priced same, it will eliminate the price incentive for consumers who are switching produces based on the price. However as the manufacturer is not reducing the price on MRP but wholesale prices, Store will not give discount to the customer and will still continue sell at MRP $12, making sure they continue to sell their store cereal product at cheaper price.

D is the correct answer.

krackgmat · Answer

Thanks Prapon for providing some insight. But in the proposed solution which you mentioned, why did you again add 20% more discount? You have applied 20% (acc to current situation) + another 20% which is equivalent to 40%. Can you clarify?

PrashantPonde · Answer

I guess I applied 20% applied only on wholesale price. In short - The manufacturer plans to reduce the wholesale price of the product from $8 to $6 (by 20%) and assumes that store will "pass on" that discount/savings to consumer by selling the product at $10 (discounted price) instead of $12 (MRP).

rajathpanta · Answer

The official explanation is more convincing. It says- the store would want to continue with the store brand because it is more profitable rather than the new brand whose profit is less.

Poorvasha · Answer

One name-brand cereal manufacturer is about to reduce wholesale prices for its cereals by 20 percent because consumers have been switching from its cereals to cheaper store brands. The success of this strategy relies on the assumption that supermarkets will pass on all of the savings by lowering the prices they charge consumers for the manufacturer’s cereals. Although supermarkets usually pass on such savings, in this case it is likely that supermarkets will not do so because _______.

The argument assumes that the supermarkets will pass on the savings of price reduction to the customers. However, the argument concludes that this time they may not do so and we need to look for reasons for this.

(A) several other name-brand cereal manufacturers are about to reduce the wholesale prices of their cereals : this won't affect the reason as to why the supermarkets will not pass on the price reduction.

(B) the average price per box of name-brand cereals has increased significantly in the last 10 years : argument is saying that the manufacturers want to reduce the price from the current situation.

(C) total annual sales of cereal - including both name-brand and store-brand cereals - have increased over the past 10 years - not sufficient

(D) supermarkets currently make far more profit on sales of store-brand cereals than on sales of name-brand cereals - if the supermarkets make far more profit on store brand cereals than on name band cereals then definitely reducing the price of something that is not event that profitable might not benefit them , so they will not pass on the savings. Correct.

(E) the current prices of the manufacturer’s cereals are comparable to the prices of name-brand cereals produced by other cereal manufacturers - out of scope

uttonio · Answer

Think about it as a beautifully and intricately written text that judges your ability to connect the dots.

"One name brand cereal manufacturer is about to reduce wholesale prices for its cereals by 20% because consumers have been switching from its cereals to cheaper store brands."  
→ the name brand cereal does not sell as much as cereals from store brands. The reason is the price of the name brand cereal is, for example, $12, while the store brand cereals are at $10. The name brand, therefore, reduces the wholesale price in an attempt to attract price-conscious customers and increase sales.

"The success of this strategy relies on the assumption that supermarkets will pass on all of the savings by lowering the prices they charge consumers for the manufacturers' cereals. Although supermarkets usually do this, in this case it is likely that they won't do so because:" 
→ supermarkets don't want to reduce the price of the name brand cereals because it must hurt their profitability.

Before diving in, we need to bear in mind that:
  1. It is common sense that people prefer more profit over less profit → supermarkets will want to keep the price high so that they have better profits. 
2. Store brands are like the brands owned by the supermarkets so supermarkets must do something in favor of the store brands.

The text mentioned store brand, so it must have something to do with the store brands.    What I would do is:
1. Find the reason why the supermarkets don't want to reduce the price of the name brand cereal while selling to customers.
2. Pay more attention to the answers that have store brands.

A. Several other name-brand cereal manufacturers are about to reduce the wholesale prices of their cereals  
→  Incorrect.  If these name brand manufacturers reduce the wholesale prices, supermarkets will be able to purchase these items at a lower price. But does this answer the question of why the supermarkets won't reduce the price of the name brand cereal stated in the text? Does this have anything to do with the name brand and the store brand mentioned in the text? No.
 
 B. The average price per box of name-brand cereals has significantly increased over the past 10 years. 
→  Incorrect.  It is the problem of the manufacturers, not the supermarkets.

C. Total annual sales of cereal—including both name-brand and store-brand cereals—have increased over the past 10 years.  
→  Incorrect. Both name brand and store-brand are mentioned.  All of them go up in sales, and still a name brand cereal’s sales is not as good as the store brand cereals. We have nothing to corroborate the reason as to why the supermarkets don't want to reduce the price of the name brand cereal.

D. Supermarkets currently make far more profit on sales of store-brand cereals than on sales of name-brand cereals.   
 → Correct. The answer mentioned both store brand cereals and name brand cereal here. 
The profit earned from store brand cereals is much more handsome than the profit earned from name-brand cereal, maybe because more people buy store-brand cereals.
So we have:
  Option 1 : selling store brand cereals with great profits and selling name brand cereal at a high price which secures better profit since the wholesale price was lower.
  Option 2 : selling store brand cereals with great profits and selling name brand cereal at a reduced price --> losing some price-conscious customers of store brand cereals to the name brand cereal. Taking into account the fact that supermarkets want to protect their own brands (store brands), they would want to attract as many customers for store brands as possible. 
- Besides, with price-conscious customers switching to buy this name brand cereal, supermarkets will secure  less profit  than the profit that would have been earned if they had kept the price high as in option 1.
So the supermarkets will choose option 1.

E. The current prices of manufacturers' cereals are comparable to the prices of name-brand cereals produced by other cereal manufacturers.  
 Incorrect.  This also does not explain why the supermarkets still want to keep the current price of the name brand cereal stated in the text.

agrasan · Answer

Hi  GMATNinja   KarishmaB   MartyMurray   DmitryFarber

(E) The current prices of manufacturers' cereals are comparable to the prices of name-brand cereals produced by other cereal manufacturers

I selected option (E) because if other cereal manufacturers currently sell without discount then they might feel pressure to give 20% discount too once the name-brand gives discount and the supermarket might not want it to happen since it will reduce its profits by passing on the discount for all other cereal manufacturers.

Could you let me know what is wrong with my reasoning? Am I making unwarranted assumptions here?

KarishmaB · Answer

Yes, this assumption is unwarranted that if one brand gives discount, others will feel the pressure to give it too. And even if this is so, if the store passes on the discount to the customers, it doesn't lose anything from the current situation. If the store buys at $10 and sells as $15, it gets $5 profit from each name brand box right now. If it were to buy for $8 because of the discount, it could sell at $13 (pass on the discount to customers) and get the same $5 profit from each box. The store lost nothing.

The difference comes into picture if the store gets much more profit on store brand - say cost is $2 and it sells it for $12. Then it may not want to pass on the discount to customers because if customers switch to name brand cereal, it misses out on the higher profit.

MartyMurray · Answer

It makes sense that other manufacturers may choose to discount their wholesale prices as well if the store offers the manufacturer's cereals at lower prices.

At the same time, "wholesale prices" are the costs to the store. So, the store would not be hurt by other cereal manufacturers discounting their wholesale prices. In fact, the store can only benefit from being able to purchase products at lower prices.

So, the store would not continue selling the manufacturer's cereals at the same prices to keep other manufacturers from discounting their wholesale prices.

One name-brand cereal manufacturer is about to reduce wholesale prices

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Critical Reasoning (CR) Questions

One name-brand cereal manufacturer is about to reduce wholesale prices

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards