Panda Corporation is a large American manufacurer of

Question

Panda Corporation is a large American manufacurer of children's clothing that has recently undertaken sharp measures to remain competitive in todays global market. In response to offshore pricing pressures, Panda Corporation laid off over 500 employees, reducing operational expenses by 18%. Since clothing manufacturers realize a one percentage point increase in sales margins for every five percentage point decrease in operational expenses, the Board of directors is satisfied that these measures will ensure Panda Corporation's long-term sustainability.
.

Based on the passage, which of the following, if true, would most weaken Board's stance?

A. Panda corporations main competitor is also an American manufacturer.
B. Panda corporations main competitor is based in China.
C. The largest manufacturer of children's clothes in China has just reduced its operational expenses by 15%
D. US consumers do not want to buy clothes manufactured offshore.
E. A large US manufacturer of childeren's clothes plans to relocate its operations to China.

TAL010 · Accepted Answer

I'll take a stab at explaining how I reached C as the final answer.

Panda Corporation is a large American manufacurer of children's clothing that has recently undertaken sharp measures to remain competitive in todays global market. In response to offshore pricing pressures, Panda Corporation laid off over 500 employees, reducing operational expenses by 18%. Since clothing manufacturers realize a one percentage point increase in sales margins for every five percentage point decrease in operational expenses, the Board of directors is satisfied that these measures will ensure Panda Corporation's long-term sustainability.
.

I understood the stimulus like so: Panda Corp is an American company that wants to stay competitve in the global market. PC believes the best course would be to cut operational costs. The board cuts operational costs by 18%-- knowing that every 5% cut corresponds with a 1% increase in sales. So basically they are expecting a 3%+ increase in sales.(margin = revenue - cost)

This is a weaken question - so we are looking for an answer that best attacks the stimulus.

Based on the passgae, which of the following, if true, would most weaken Board's stance?
A. Panda corporations main competitor is also an American manufacturer.  Even if so, doesn't weaken or strenghten the argument whatsoever.  
B. Panda corporations main competitor is based in China.  Same as above.   Doesn't deal with any questions why their plan will not work. 
C. The largest manufacturer of children's clothes in China has just reduced its operational expenses by 15%  Correct. PC was reducing its operational costs to keep up with other markets-- if other markets-whom are presumably doing better than PC cut operational costs even more, then PC is back where they started and thus not competitive.  
D. US consumers do not want to buy clothes manufactured offshore.  Tempting because it seems to imply that the sales will not show an increase, but this is wrong because it assumes that the primary market for PC is in America. Because we do not know how their sales are measured--besides in comparison with other markets, we cannot choose D. 
E. A large US manufacturer of childerens clothes plans to relocate is operations to China.  Completely out of scope.

DexDee · Answer

I pick C.

The offshore manufacturer ( a Chinese corp ) has also reduced the operational expenses by a  similar  percentage. Such a move will aggravate the pricing pressure to American manufacturers, beyond the compensatory action.

shrive555 · Answer

based on bold lines, what's wrong with D, if consumers do not buy cloths manufactured offshore, it will decrease sales, since sales and operational expenses are proportional, No matter what % of operational expenses is reduced,if sales is not increasing then sustainability of corporation can be questioned.

ravikrishna1979 · Answer

with the same logic, but where does it mentioned that Chinese company has got market in US or the chinese largest manufacturing company is equivalent to that of US.It could be that chinese is much much smaller compared to that of US. Secondly there could be other largest market in Europe or in India where US company clothes can be sold.

I don't think this question atleast is valid for GMAT just by comparing US companies with that of Chinese even though in reality it might be right.

jayantheinstein · Answer

ravikrishna1979

Please find the reply :-

Panda Corporation is a large American manufacurer of children's clothing that has recently undertaken sharp measures to remain competitive in  Todays global market

Note the word "GLOBAL MARKET"

Today's global market here is  implied  as panda corporation's competition with a similar competitor in china.

so option c tells that :

The largest manufacturer of children's clothes in China has just reduced its operational expenses by 15%

This means that if the Chinese manufacturer employs a similar strategy as that of the panda corporation ,clearly sales margin of Chinese manufacturer will increase and hence the panda corporation cannot become more competitive globally.

Hope it makes sense.

onkargm · Answer

How can a Global Clothes manufacturing company is affected by operational changes by a company in China, What if this "Global company" does not sell its products in China , and sells everywhere else apart from China. This question makes us assume that , the company in argument has a market in China, the information nowhere mentioned in the question.  VeritasPrepKarishma  can you please guide on this ?

bluetrain · Answer

ravikrishna1979

In addition to explanation above

Yes, partially your argument seems reasonable.

But, the reason why the company cut off their expenses is to keep their competitive advantage.

Therefore, C is better option.

frankgraves · Answer

Sorry but I think this is a strong GMAT question.
The OA is C under the reason that if the largest manufacturer in China also uses the same strategy than Panda will not be competitive.
So 15% expense reduction will translate into 5% increase in sales margin, compared to 6% increase by Panda.
The question is : How can this become a threat for Panda competitiveness?
We do not know the sales margin of Panda and the China corporation before the cut.
Hence, we cannot conclude whether the operational expense cut by China corporation will kick Panda out of competition.
Please advise if you have different opinion.

Sahith_Manikanta · Answer

I also have the same doubt. We aren't given any information regarding how big of a manufacturer the coop in China is when compared to Panda coop, so we cannot say that because coop in China also reduced their operational expenses by 15%, it is going to damage Panda coop plans. Bunuel KarishmaB GMATNinja pls explain the solution.

KarishmaB · Answer

This is what the question tells us - there is price pressure in the global market. 
So say PC sells per item at $20 but others sell at $19 in the global market. So PC needs to reduce prices to become competitive. 
So PC reduces cost from say $10 to $8 and starts selling at $18 per piece. Its sales margin of 50% has gone up to 55%. It may be able to survive. 
But what happens if biggest China supplier also reduced op costs? Then it will bring down the current $19 per piece to perhaps $17 per piece. Then Panda will still not be competitive. 
We know well that China is the manufacturing hub and if we are talking about their biggest manufacturer, it means that author expects you to take it as a serious competitor of PC.

eaat · Answer

I chose C because it's saying that in response to the offshore pricing pressures that they reduced operational expenses. But if another manufacturer like C also reduces its operational expenses, we can't guarantee that this will ensure its long-term sustainability.

Sajjad1994 · Answer

Explanation

The Board’s logic

Panda Corp laid off employees ---> operational expenses reduced by 18%. 
 Industry rule: every 5% decrease in operational expenses ---> 1 percentage point increase in sales margins. 
 So 18% decrease in expenses ---> 3.6 percentage point increase in sales margins. 
 Board thinks this ensures long-term sustainability.

Assumptions the Board is making

The only major factor affecting sustainability is sales margins. Their competitors won’t also improve margins or lower prices further to keep pressure on Panda. The benefit from expense reduction won’t be negated by losing sales.

What would weaken the Board’s stance?

We need something that suggests the improved margin may not ensure long-term sustainability because competitors could respond or because Panda’s situation relative to competitors hasn’t improved enough.

Find the best answer

A)  Main competitor is also American. This doesn’t necessarily weaken the Board, since if both face same cost structure, Panda’s cut might help.

B)  Main competitor is based in China. This might already be true; offshore pricing pressures were mentioned. But just knowing where it’s based doesn’t directly show Panda’s move insufficient.

C)  Largest manufacturer in China just reduced operational expenses by 15%. That means they also get a margin increase (15% ---> 3 percentage point margin gain). Panda’s 3.6 pp gain is only slightly better; Chinese competitor can lower prices more and still keep margins, maintaining price pressure. This directly weakens the idea Panda’s move ensures sustainability.

D)  US consumers don’t want clothes manufactured offshore. That would help Panda (American-made preference), so strengthens, not weakens.

E)  A large US manufacturer plans to move to China. That might increase competition from low-cost later, but Panda’s current move might still help short term. Less direct than C, because moving takes time and might not affect immediate competitive pricing as fast as an already-low-cost Chinese player cutting costs further now.

Answer: C

vibhor1902 · Answer

I think that the question is a little low quality as the answer choice requires assumptions which can cannot be the case in actual exam.

egmat · Answer

Great question!  Your concern about not knowing the relative size is understandable, but let me show you why it doesn't matter here.

The Board's Logic: 
Panda faces  offshore pricing pressures  → They cut operational expenses by  18%  → Board believes this ensures  long-term sustainability .

The Hidden Assumption: 
The Board assumes their cost-cutting will  close the competitive gap  with offshore manufacturers. They're thinking: "We cut  18% , so now we can compete."

Why (C) Weakens This: 
Answer (C) tells us the  largest  Chinese children's clothing manufacturer  also  just reduced operational expenses by  15% .

Think of it like a race: 
 - You're  10  meters behind
- Your plan: speed up by  18%  to catch up
- But then you learn the leader  also  sped up by  15% 
- Now your plan to close the gap is   much weaker

Key Insight: 
We don't need to know  exactly  how big the Chinese company is. The passage says it's the  "largest"  manufacturer in China - that's enough to establish they're a significant player in the offshore competition that's pressuring Panda.

Note that  the question asks what  weakens the Board's stance  - not what guarantees Panda will fail. If your competitor is  also  cutting costs while you cut costs, your strategy is  less effective  than you planned. The Board's confidence that these measures "will ensure long-term sustainability" is now  questionable .

Bottom line:  Panda runs faster, but China runs faster too. The gap barely closes. The Board's optimism is weakened.

Answer: C

Adit_ · Answer

KarishmaB

Yes but we are having to make a very strong assumption here that "China is a massive manufacturing hub". In reality it is true but the stem makes no mention of China. For all I can assume China's largest manufacturer maybe be completely incompetent or irrelevant to how Panda Corp might sustain itself. There are too many ifs, it feels like.
Kindly help me out if I am mistaken.

Adit_ · Answer

egmat

I understand your view point but still, the way Panda Corp treats its offshore expenses maybe completely irrelevant to how and what China do right? Them being the largest has little meaning when the stem made no mention of it. 
For example: Let's pick the largest company of Madagascar and they cut costs by 15%
Is that going to affect the mobile suppliers like Apple in USA? Apple of USA is definitely going to be competing with a company of its similar caliber. It will still sustain if the largest company from Madagascar put up a strong fight. I understand the stem means that 18% cut --> Sustain. Now if we replace Apple here, it might have been facing difficulties with respect to its competitors in Samsung and hence it has brought the costs down by 18% and maybe Samsung has respond/not responded we dont know. But because they did this cut they are strongly believing that they will sustain. Now if Samsung did the same thing it will "weaken" although not sure if it will be unsustainable but definitely weaken, agreed. But here with no mention of China or what about China how do we know it will weaken is my question.

But if the same option were pointed out in general like a large company responded in so and so way I think that would make it a proper weakener as compared to pointing to a country with no mention of it in the stem. Looking forward to your thoughts on this.

Kindly help me out.

AbhishekP220108 · Answer

Hi  Adit_  , let me try to help, as we don't know when the EGMAT is going to reply.

Yes, your point is valid, no doubt. So you have pointed out 2 queries If I am not wrong,

1. But here with no mention of China or what about China How do we know it will weaken Is my question

So as per Option C, the  largest manufacturer of children's clothes in China has just reduced its operational expenses by 15%. We got an extra premise as an option, so from this we are taking the aspect of China. The point is how they will weaken. Well, in the argument it is given that PC wants to remain competitive in today's global market, so the global market can include China, and the option choice is considering the Chinese market as one of the global markets. I understand there are too many assumptions, and frankly speaking, I also didn't like this question very much, but yeah, it's good to practice, considering we have to solve the question only as per given information.

So yes, if the Chinese market's largest manufacturer is reducing its OC, then maybe PC is getting tough competition in the Chinese market, and because of that, long-term sustainability can be impacted.

2. Make it a proper weakener as compared to pointing to a country with no mention of it in the stem, so as per the question, we are not looking for a proper weakener; the question stem just asks to find which option will most weaken, so among the given options, C is weakening the most. Even in an actual exam or in OG, we get a question to select the most weaken among the given ones, so yes, this is the valid question stem.

Hope this helps

KarishmaB · Answer

They are talking about the largest manufacturer of a country which we know to be the manufacturing center. The test maker has made it apparent that you should consider it to be a serious competitor of PC. You will need to be able to infer this from the argument. Besides, you are overthinking a non official question and that is never useful. Your takeaway is simply that decreasing costs may not help if the competitor decreases cost too and that is it. Focus on the intent of the question, not the precise language if it is not official.

Panda Corporation is a large American manufacurer of

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