In order to increase revenues, a cell-phone company has

Question

In order to increase revenues, a cell-phone company has decided to change its fee structure.Instead of charging a flat rate of $20 per month and $0.50 for every minute over 200 minutes, the company will now charge $50 per month for unlimited usage.

Which of the following is a consideration that, if true, suggests that the new plan will not actually increase the company's revenues?

A) A rival-company , which charges no start-up fee , offers an unlimited calling plan for $40 per month.
B) Two-thirds of the company's customers use less than 500 minutes per month.
C) Studies have shown that customers using unlimited calling plans will increase their monthly usage of minutes by over 50 percent.
D) One-fifth of the company's customers use in excess of 1,000 minutes per month.
E) In recent months the company has received several complaints of insufficient signal strength and poor customer service.
 how to come to conclusion of the solution to be a).I choose B. But according to the solution , the answer is a. and Why?

Source: Mc-Graw Hill's

doe007 · Accepted Answer

The company is expecting an increase of revenue by increasing the monthly fee. Here the underlying assumption is that the customer base will remain unchanged. If a competitor offers a much cheaper plan with similar benefits, it is likely that customers will switch to that rival company’s plan and that will reduce the company’s revenue.

A)  Correct answer .
B) Without knowing cost of calls per minute, we cannot deduce whether new plan will increase the company's revenues.
c) This statement again does not provide any information on whether new plan will increase the company's revenues.
D) If this true, new plan may or may not increase the company's revenues, but we cannot say for sure.
E) This may affect the customer base. However, there is no information on effect of new plan on the company's revenues.

jaituteja · Answer

A) A rival-company , which charges no start-up fee , offers an unlimited calling plan for $40 per month.
 Competition from rivals is not a concern. We are asked how new plan will not increase company's revvenues.

B) Two-thirds of the company's customers use less than 500 minutes per month. 
Suppose, we have 99 customers.

Older PLan: 2/3 of 99 => 66 people use less than 500 min/month.

To minimize the plan's value, lets assume these 66 people make less than 200 min/month.

Now, they will be charged 66* 20$ => 1320$

Remaining 33 people, lets assume they make 500min/month.
they will be charge 33*20$ + 33*0.5*300 => 660 + 4950 => 5610$

total revenues for Older plan => 1320 + 5610 => 6930$

REMEMBER, this is the minimal cost. 
New plan: 50$ per person
50*99 => 4950$

Thus plan B is not effective. CORRECT

C) Studies have shown that customers using unlimited calling plans will increase their monthly usage of minutes by over 50 percent. 
This will show the new plan will be more effective than expected.

D) One-fifth of the company's customers use in excess of 1,000 minutes per month. 
This can also be calculated as per B. and will hold true.

E) In recent months the company has received several complaints of insufficient signal strength and poor customer service.

Out of Scope.

I am confused b/w B and D, however i am more confused how A is correct??

Experts Please help..!!!

Thanks,
Jai

madn800 · Answer

C and E can be easily eliminated 
Now we have to choose between A, B or D
"Charging a flat rate of $20 per month and $0.50 for every minute over 200 minutes" means 
0 to 200 mins- $20 fixed
from 201st min on wards- $1/2 for every min
B. Two-thirds of the company's customers use less than 500 minutes per month
Let there be 3K customers
Under New plan(N):
All will be charged=(3K) X 50= 150K
Under Old plan(O):
 (I)2/3=2K customers ( say they use an avg of 400 min)
fixed :2K X 20= 40K
variable:(400-200)X1/2X2K=200K( here itself the revenue has increased over old plan i.e, 240K when we have calculated for 2/3rd alone. When we add revenue from remaining 1/3, total revenue will be even more higher.
 (II)1/3=1K
fixed : 
variable:
i.e,{ total of old plan (I)+(II)}>new plan which suggests that the new plan will actually NOT increase the company's revenue.

D) One-fifth of the company's customers use in excess of 1,000 minutes per month.
Under New plan(N):
3K X 50= 150 K
Under Old plan(O):
(I)1/5= 600 customers ( say they talk for avg of 1100min)
fixed :600X50=30K
variable:(1100-200)X1/2X600=270K
HERE ALSO the revenue has increased over old plan i.e, 300K when we have calculated for 2/3rd alone. When we add revenue from remaining 4/5, total revenue will be even more higher.
(II)4/5= 2400 customers
fixed : 
variable:
i.e,{ total of old plan (I)+(II)}>new plan which suggests that the new plan will actually not increase the company's revenue.

both B and D are satisfying the condition.
Bumping for further review and discussions.

madn800 · Answer

Moreover, if we consider

A) A rival-company , which charges no start-up fee , offers an unlimited calling plan for $40 per month.
(A) can also argued to be true, as, if the above is true then the rival company will attract all the customers of the company charging $50 thus undermining the latter's revenue and not causing an increase in revenues.

madn800 · Answer

correction:
(I)1/5= 600 customers ( say they talk for avg of 1100min)
fixed :600X50=30K(wrong)
 600X20=12K(correct)
However, final answer not affected.

madn800 · Answer

correction1:
variable:(400-200)X1/2X2K=200K( here itself the revenue has increased over old plan(wrong) i.e, 240K when we have calculated for 2/3rd alone. When we add revenue from remaining 1/3, total revenue will be even more higher.

variable:(400-200)X1/2X2K=200K( here itself the revenue has increased over NEW plan(CORRECT) i.e, 240K when we have calculated for 2/3rd alone. When we add revenue from remaining 1/3, total revenue will be even more higher.

SIMILAR correction in second part also.
HERE ALSO the revenue has increased over old plan(wrong) i.e, 300K when we have calculated for 2/3rd alone

HERE ALSO the revenue has increased over NEW plan(CORRECT) i.e, 300K when we have calculated for 2/3rd alone
Sorry for the errors guys. However all errors corrected.
WHERE ARE THE EXPERTS??????

igotthis · Answer

Its true that both B and D reduce the company's revenue.
But the math in B and D does not matter if you have another company offering clients @ $10/month cheaper with no start up fee!

madn800 · Answer

got it "igotthis" Manager
thanks for the explanation.

kvazar · Answer

Actually, I spent 7 minutes - why? Because both B-D give the same answer, so they can't be true, so A is the only answer that can be, but it makes no sense. Maybe subscribers are legally obliged to remain with this company, so A is out of scope, so to accept this answer we are making assumptions that subscribers are free to chose their provider. How is this true? Can we actually make assumptions? Are this kind of questions common?

gauravkaushik8591 · Answer

haha you're right. makes me think if i should ever buy a phone on contract or not. = P

ronr34 · Answer

That's exactly what I was thinking.
Maybe they get their phone from work. Maybe the rival company has almost no coverage? Maybe the rival company sells only one type of phone?
It's too big of a jump (in my opinion) to make... so I don't see A as the right answer.
Can someone else weigh in here?

itzmyzone911 · Answer

This is a great question...(may be just because I got it right that’s why)..just kidding!!

Back to the question!

A. For the time being let us eliminate A, because reading it 1st, it didn’t strike me to be the correct ans. , until I reviewed the rest.

B. A definite NO.

Reviewing analysis carried out by jatuteja which is correct as far as the math is concerned.

Basically, the assumption that customer base remains intact after implementing new plan is unwarranted.

C and D also carry same reasoning as B and hence can be ruled out convincingly.

E. So what? The company may have received complaints in the last few months, but may have addressed all the concerns last week. Also this has no bearing on the new customer base. In the worst case scenario, the company may have lost 1%, 2%, 10% or 50% of the customers, but may have gained another new customers increasing the customer base by 50%, 100%, 200% or 2000% (unless otherwise these new customers are related to the old affected customers so as to be discouraged by them…which obviously is too much of an assumption) and hence could earn more revenues …Not a strong contender

Back to A. Not much of math involved and after ruling out the remaining, seems to be an answer based more on common sense than anything else.

Hence, answer is A.

RatneshS · Answer

B is not correct because
Case Before: cost to customers = $20 + .50(x-200) {because 200 minutes are free and we are charged over 200 minutes}
1>so if customer talks for 500 minutes
cost= 20+ .50(500-200)= 20+ 150= 170$
2> if customer talks for 200 minutes
cost= 20+ .50(200-200)=20$

Case after: customer has to pay 50$

so we can conclude that plan may or may not be favourable to customer depending on his minutes usage( 170$ VS 50$)

D can be equated thae same as is B

siddharthharsh · Answer

For the revenue to be equal for the two plans the average number of usage minutes has to be 20 + 0.5(t-200) = 50
t = 260
if the average usage exceeds 260 then plan will not succeed.

A - So the customer have better option, seems correct, lets check for a better option
B - Not sufficient, we do not know if average usage is less then or more than 260 min
C - unlimited calling plan will irrespective generate the same revenue whether the usage is increased
D - We do not know about the usage of other four-fifth of the customers, so we do not know the average usage of customers
E - Irrelevant

Hence, A

arunavamunshi1988 · Answer

Hi,
How come A be the ans choice? at your 1st glance on it, this option might be very lucrative. But wait do we know anything about this rival company? In reality, you might get many cheaper plans in market, but will you be very sure to take up that plan unless you know certain things? 
1. Quality of Call
2. Network issues(if any)
3. Any bad image in market(Companies often offer cheaper product to overcome their bad image)
Can you compromise these factors against cheaper call rate? No right?
In order to choose option A, the rival corp needs to be competitive enough to pull the customer base of the cell phone company by offering cheaper calls. Since we don't know any information about the rival corp so we cannot say whether this option weakens the argument or not.
According to me "C) Studies have shown that customers using unlimited calling plans will increase their monthly usage of minutes by over 50 percent." is the correct answer because
We know at older rate you can make a monthly usage of 200 min with a fixed rate of $20/month. So if a customer is paying $20 for 200 min, so he/she is most likely to make 200 mins call. Now if he/she makes another 100 min(or makes 50% increase in usage) call with $0.50/min call rate, then he/she would have to pay another $50 resulting 50+20 = $70 to the company.

Where in the new plan the company will receive $50 for the same usage. So this might significantly bring down the company's revenue. And our assumption here is "the customer base is the same or no significant increase in customer base". So there is a high chance that the new plan will not work.

Guys what do u think?

sayantanc2k · Answer

For strengthening / weakening questions, a  could be true  scenario suffices, a  must be true  scenario is not required. Option A COULD BE a reason that the company's plan will not be successful. This condition is enough for it to be the correct answer. (Only in assumption questions, a  must be true  condition needs to be satisfied).

siddharthharsh · Answer

We have to keep in mind what the question is asking:
"Which of the following is a consideration that, if true, suggests that the new plan will not actually increase the company's revenues"

As per C, certain usage will increase, but since it is a fixed plan, actual usage has no correlation with revenue, so it does not matter. In the same way even if these users were to decrease their usage it still won't have any impact on revenue.

Also for A, we are free to make reasonable assumptions, we are only trying to weaken the prospects of the plan's success.

sandeepb17 · Answer

Now, why B and D are wrong...
We can easily eliminate C and E.

After the launch of new plan, we are not sure about the customers who will subscribe to the new plan. Customer base may increase, decrease or remains same.

We can calculate the before-revenue and after-revenue. But for that we have to assume that customer base remains same.

We need to keep in mind that a answer choice should be true in all cases, even in extreme practical cases such as customer base might shoot up from 100 to 1,00,000 or to even a crore (Courtesy to JIO :wink:

) or might find no new customers at all and also looses its current customers

In weaken/strengthen questions, don’t assume.

Please correct me if I’m wrong in my logic.

) or might find no new customers at all and also looses its current customers In weaken/strengthen questions, don’t assume. Please correct me if I’m wrong in my logic.

zet · Answer

Assumptions: Usage will not change
Market situation will not change (competitors etc.)
No other event affecting costs will happen

A) A rival-company , which charges no start-up fee , offers an unlimited calling plan for $40 per month.  It seems out of topic, since the argument is about the company and its own budgeting structure. Still keep it. 
B) Two-thirds of the company's customers use less than 500 minutes per month.  strengthen, if we assume that usage data will not change 
C) Studies have shown that customers using unlimited calling plans will increase their monthly usage of minutes by over 50 percent.  Aha! attacks to the assumption. Weaken 
D) One-fifth of the company's customers use in excess of 1,000 minutes per month.  We don't know what is 1/5th of customers. maybe 4/5 th of customers limit their usage by 200 (strengthen the argument) or maybe they are using 900min. (weaken the argument) 
E) In recent months the company has received several complaints of insufficient signal strength and poor customer service.  Out of Scope

Both A and C attacks assumptions. However, A seems out of scope since the company again decrease the prices and get all the customers of the competitor.
However, C directly attacks to the assumption considering the increase of costs (maybe infrastructural needs to handle the over usage etc) due to increase of over usage

Am I wrong?

In order to increase revenues, a cell-phone company has

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