Coffee shop owner: A large number of customers will pay at least the

Question

Coffee shop owner: A large number of customers will pay at least the fair market value for a cup of coffee, even if there is no formal charge. Some will pay more than this out of appreciation of the trust that is placed in them. And our total number of customers is likely to increase. We could therefore improve our net cash flow by implementing an honor system in which customers pay what they wish for coffee by depositing money in a can.

Manager: We're likely to lose money on this plan. Many customers would cheat the system, paying a very small sum or nothing at all.

Which of the following, if true, would best support the owner’s plan, in light of the manager’s concern?

(A) The new system if implemented, would increase the number of customers.

(B) By roasting its own coffee, the shop has managed to reduce the difficulties and cost of maintaining an inventory of freshly roasted coffee.

(C) Many customers stay in the cafe for long stretches of time.

(D) The shop makes a substantial profit from pastries and other food bought by the coffee drinkers.

(E) No other coffee shop in the area has such a system.

Honor System

Step 1: Identify the Question

The phrasing best support the owner’s plan indicates that this is a  Strengthen the Argument  question.

Step 2: Deconstruct the Argument

Owner:

Many ppl will pay market value for coffee

Some ppl will pay > market value

# of customers will ↑

Manager:

Many ppl will cheat→ © less $

Step 3: Pause and State the Goal

The question asks you to find an answer that supports the owner’s plan, in light of the manager’s concern. The owner’s conclusion is that implementing an honor system will increase cash flow. The manager’s objection is that many customers will cheat the system, and that this will reduce cash flow. The right answer will show that the honor system actually may increase cash flow, or at least that it may not decrease cash flow. Specifically, the answer should address the manager’s concern about cheating: possibly by explaining why cheating will not be a problem or by providing a reason the plan could be profitable even if cheating does occur.

Step 4: Work from Wrong to Right

(A) This is already stated as a premise of the owner’s argument. Stating it again does not provide additional support for the argument. Also, it does not take into account the manager’s concern about cheating. It’s possible that a large number of the new customers would cost the coffee shop money by cheating, rather than bringing in more money.

(B) The owner’s conclusion deals specifically with the results of implementing an honor system, not with whether the coffee shop is successful in general. There’s no way to know whether the coffee shop’s practice of roasting its own coffee will change after the honor system is implemented. Also, this answer does not address the manager’s concern about cheating in any way.

(C) Customers who stay in the cafe for a long time might bring in more income or less income, depending on their behavior. They might purchase more coffee, and if they do so at a fair price, the owner’s plan will work. They might also cheat the honor system, then stay in the cafe for a long time, tying up space that could be used by paying customers.

(D) CORRECT . The honor system only applies to coffee, not to pastries and other food. If the shop currently makes a profit from food purchased by the coffee drinkers, then attracting more coffee drinkers will probably increase the profit from food purchases. Even if many of those coffee drinkers don’t pay a fair amount for their coffee, it’s possible that the increased profit on food will compensate for the decreased profit on coffee.

(E) If no other coffee shop in the area has such a system, the plan could either be successful or unsuccessful. Perhaps if the honor system is seen as a novelty, more new customers will be attracted to the coffee shop. On the other hand, if customers are not familiar with the honor system, they may be more likely to cheat.

GMATNinja · Accepted Answer

According to the coffee shop owner, implementing an honor system would increase the total number of customers, and the manager does not dispute this claim. However, the manager believes that "many customers would cheat the system, paying a very small sum or nothing at all." In other words, the manager says, "Who cares if we increase the total number of customers? If many of them pay a small sum or nothing at all, we will probably lose money."

Choice (D) addresses the manager's concern by saying, "Yes, we might lose some money on  coffee , but by increasing the total number of customers, we will increase the amount of food/pastries that we sell. Since we make a substantial profit selling food/pastries, those profits will make up for the relatively small amount of money we might lose on coffee."

Choice (B) tells us that the shop has been able to save some money by roasting its own coffee, but it does not address the managers concern. Even if they have a cheaper way to make coffee, if many people are paying little or nothing for the coffee, the shop would still likely lose money on coffee.

Choice (D) is the best answer because it directly addresses the manager's concern.

I hope that helps!

akhil911 · Answer

Owners Premise - Coffee drinkers would pay the fair value for the coffee and the number of customers is likely to increase
Conclusion - Netcashflow will increase.
Manager Premise - Coffee drinkers will cheat and pay a small amount for the coffee.
 
We have to strengthen the Conclusion of the owners argument - that is cashflow is going to increase because of the plan he proposes.
 It is possible that the owners plan works - that is coffee drinkers play a fair value for the coffee or even more and in that case the cashflow would increase.
It is also possible that coffee drinkers cheat as the manager suggests but even if that happens it is possible that the net cashflow of the coffee shop increases as a result of this plan in any possible way. If any answer choice can show this then that strengthens the owners conclusion.
 
(A) The new system. it implemented, would increase the number of customers.
-> Even if the number of customers increase it is possible that the customers cheat and hence netcashflow could go down.

(B) By roasting its own coffee, the shop has managed ho reduce the difficulties and cost of maintaining an inventory of freshly roasted coffee.
-> This choice does not affect the conclusion in any way.

(C) Many customers stay in the cafe for long stretches of time.
-> This choice does not affect the conclusion in any way. Even if they stay long that in no way suggests that cashflow would go up. If more people stay in coffee shop that actually pay less than market place the cashflow could even decrease further.

(D) The shop makes a substantial proﬁt from pastries and other food bought by the coffee drinkers.
-> Hmm , this answer choice gives a reason as to why the cashflow could actually go up. If coffee drinkers eat other food from the coffee shop then that can actually increase the cashflow of the coffee shop.

(E) No other coffee shop in the area has such a system.
-> This choice does not affect the conclusion in any way.

WaterFlowsUp · Answer

Everytime i read an official question, my respect for the test makers go up several folds.
The issue at hand is: no charge for coffee. Customers can drink coffee and pay as much as they wish. Owner asserts people will be fair and pay at least the amount rightly deserved. But manager says people may end up taking undue advantage.
Now, what if coffee is free but the coffee shop makes substantial profit from the delicatessens? It is also said #of customers will go up so the profit from pastries will also go up and so revenue will go up.

vishwaprakash · Answer

Coffee shop owner: A large number of customers will pay at least the fair market value for a cup of coffee, even
if there is no formal charge. Some will pay more than this out oi appreciation of the trust that is placed in them.
And our total number of customers is likely to increase. We could therefore improve our net cash ﬂow by
implementing an honor system in which customers pay what they wish for coffee by depositing money in a can.
Manager: We're likely to lose money on this plan. Many customers would cheat the system, paying a very small
sum or nothing at all.

Argument Analysis :
Owner : No price tag, let customer pay what they want. Large number of Customer will pay fair price. Total customer base will increase, improving net cash flow.
Manager : Customer will cheat, leading to losses.

What can best support Owner's argument, if manager is true.
Pre thinking :
1. If Customer base increases hugely and Proportion of cheater is negligible.
2. If Customer buy something else along with coffee, and the price of add on stuff compensate the free tag of coffee.

POE.

(A) The new system. it implemented, would increase the number oi customers.
ISWAT - (Most attractive) - Agreed that it will increase customer, but what if high proportion of customers don't pay. So store will end in losses - Incorrect.

(B) By roasting its own coﬂee, the shop has managed ho reduce the difficulties and cost of maintaining an
inventory of freshly roasted coffee.
Out of Scope - This knowledge of roasting expense and it's impact on Revenue has not been shared with us. also, it no where connects to the plan shared in argument. So out of scope - Incorrect

(C) Many customers stay in the cafe for long stretches of time.
out of scope - Correlation between period of stay and Income from stay of customer is not discussed in argument. Hence out of scope - Incorrect.

(D) The shop makes a substantial proﬁt from pastries and other food bought by the coffee drinkers.
Correct - If customer buys Sides along with coffee and those side dishes makes nice profit, then it will compensate price tag free coffee. Also due to shop's plan, Customer intake will increase, and hence sales of sides will increase, Increasing profit.

(E) No other coffee shop in the area has such a system.
out of scope - Other shop may not have it, but this does not prove that shop will make profit.

option D is correct

OptimusPrepJanielle · Answer

Coffee shop owner: A large number of customers will pay at least the fair market value for a cup of coffee, even
if there is no formal charge. Some will pay more than this out of appreciation of the trust that is placed in them.
And our total number of customers is likely to increase. We could therefore improve our net cash ﬂow by
implementing an honor system in which customers pay what they wish for coffee by depositing money in a can.
Manager: We're likely to lose money on this plan. Many customers would cheat the system, paying a very small
sum or nothing at all.

Which of the following, if true, would best support the owner's plan, in light of the manager's concern?
 The manager's concern is that they will lose money because the customers will cheat. The correct choice addresses this issue. Look for an answer choice that shows that the customers will continue to pay somehow and the cafe won't lose money.

(A) The new system. if implemented, would increase the number of customers.
 An increase in customers could mean an increase in customers who don't pay. 
(B) By roasting its own coffee, the shop has managed to reduce the difficulties and cost of maintaining an
inventory of freshly roasted coffee.
 The difficulties and cost of maintaining freshly roasted coffee are not relevant. 
(C) Many customers stay in the cafe for long stretches of time.
 The time that customers stay in the cafe is not relevant. They can stay but not spend. 
 (D)  The shop makes a substantial proﬁt from pastries and other food bought by the coffee drinkers.
 This shows that even if the customers cheat on the coffee cost the cafe receives profit from pastries and other food. 
(E) No other coffee shop in the area has such a system.
 Whether or not it's a unique system is not relevant.

okay · Answer

I'm not so sure about this question. I chose B, as it directly affects the cost of the coffee- lower costs=more profit, assuming revenue stays the same (if customers pay the same or more, as the manager describes, profits will increase).

Answer (D): The shop makes a substantial pro???t from pastries and other food bought by the coffee drinkers. How does this affect the conclusion of being more profitable? People may already be buying sides...

KGump · Answer

GMATNinja ,  mikemcgarry 
I chose A because i did not read option D properly. I stopped at pastries thinking pastries are not relevant to the discussion.

My concern is that is option A incorrect because its a repetition of the premise or because it doesn't directly address the manager's concern.
(The premise says the customers are LIKELY to increase whereas the answer option says they WOULD increase)

Thanks

GMATNinjaTwo · Answer

The owner says that the "total number of customers is  likely  to increase." Choice (A) then strengthens the owner's position by saying that the number of customers WILL increase. However, this does not address the manager's concern. Even if choice (A) is true, the manager would say, "Who cares if we increase the total number of customers? If many of them pay a small sum or nothing at all, we will probably lose money."

As described  below , only choice (D) addresses the manager's concern.

adkikani · Answer

Hi  GMATNinjaTwo   GMATNinja

I too fell for (B) trap at first glance. 
In a practical market situation, will reducing inventory cost help in improving productivity
ie no of coffee served if not contribute to increase in net cash flow ie profit?

GMATNinja · Answer

All else equal, if a store reduces its costs, then that would obviously improve its profits.

But this is something that the coffee shop has  already  done ("the shop  has managed  to reduce the difficulties and cost..."). In other words, this change has already been implemented and has nothing to do with the owner's plan.

Choice (B) describes a way that the shop has saved money, but if the shop implements an honor system and customers start paying little or nothing (i.e. decreased revenues), then the shop could lose money.

We need something that supports the owner's plan IN LIGHT OF the manager's concern. As described in  this post , only choice (D) addresses the manager's concern.

JAIN09 · Answer

GMATNinja 
net cash flow:
does it mean profit or revenue?

GMATNinjaTwo · Answer

Net cash flow is more like profit than revenue (though "net cash flow" and "profits" are two different things). But don't overthink the financial definitions here...

Let's say the coffee shop currently averages $1,000/day in coffee sales. Keep all other variables equal and imagine that they implement an honor system. If people cheat the system and only pay $800 for the same amount of coffee, then net cash flow will decrease. If, instead, people pay more than $1,000 "out of appreciation of the trust that is placed in them," then net cash flow will be improved.

In other words, for this example, an increase in revenue presumably increases both profits and net cash flow.

yliu · Answer

I am confused about this question. Even if D can help improve the profit, it has nothing to do with implementing the honor system. The owner said the customer base is like to increase, but didn't say it will increase because of the honor system. So increasing customer base is a fact and has nothing to do with the honor system. How could D make sense here?

GMATNinjaTwo · Answer

yliu , try reviewing  this post . The idea is that implementing the honor system will increase the number of customers. Whether this results in an increase or decrease in  coffee  profits is largely irrelevant. Why? Because if we increase the number of customers (by implementing the honor system), the shop will increase its profits from sales of pastries and other food.

Akshit03 · Answer

"implementing an honor system would increase the total number of customers"

How can we infer that?
Correct me where I'm thinking wrong but the question says " And our total number
of customers is likely to increase" in isolation, which means they are going to increase anyway irrespective of any honor system plan.

I read the passage in this way. Where am I thinking wrong because I don't say a casual relationship.

Thanks.

GMATNinja · Answer

The owner states that the total number of customers would increase  in order to support his/her conclusion  that the shop would "improve   net cash flow by implementing an honor system." Look at the exact wording of the relevant piece of the passage:
 
The use of the word "and" is a clear indicator that owner is listing separate pieces of evidence that each support his/her conclusion. Structured in a slightly different way, the owner is arguing that:

"We could therefore improve our net cash flow by implementing an honor system"  BECAUSE  
 "some   will pay more than   out of appreciation of the trust that is placed in them.  AND  
 our total number of customers is likely to increase."

I hope that helps!

egmat · Answer

The passage is about the plan of the coffee shop owner and the criticism from the manager related to the revenue. The manager is only concerned about the revenue because he/she believes that the plan of the owner will decrease the revenue. Option B - Let's assume that roasting the coffee reduces the cost, thus, they will have a cheaper way to make coffee. But even if the coffee is cheap now, how can we know the people will pay even the minimum cost price of the coffee. The coffee will continue to lose profit even of the cost price is reduced. Option D - The option directly addresses the manager's concern and provides information about a different aspect. The coffee shop may lose money with the owner's plan but since the number of customers is increasing, the shop would still continue to make a substantial profit by selling pastries/food. In essence, this option tells us that coffee is not the main source of revenue for the coffee shop. Thanks

MHIKER · Answer

The owner says that an honor system that the coffee shop will not charge any fixed amount for coffee and customer will pay according to their satisfaction. The owner claimed that this owner system will increase customers and will lead to increase in net cash flow. But the manager doubts that many customers will cheat and will pay nothing. 
The question asks to find an answer to support the owner’s plan in concern with the manager's plan.

(A) The premise already states that the new plan will the number of customers. Mentioning it again will not support the owner’s argument. It also doesn’t consider the manager’s concern. It may happen that if additional customers cheat then the coffee shop will incur loss rather than earning more money. 
(B) This is irrelevant to the owner’s plan. 
(C) A longtime waiting of customers in the coffee shop may bring more income buying more coffee and paying for those. But the reverse may happen if they cheat. 
  (D) This statement confirms that the honor system will bring more coffee drinkers the coffee shop earn a substantial profit from coffee drinkers through selling pastries and other foods as these items are not included in the honor system. So the owner’s plan will work even though many of the coffee drinkers don’t pay fair value for coffee. The loss from coffee will be compensated from pastries and other food’s profit.   
(E) This option will work like option C. There may be more customers for coffee, but they may pay equal to fair value or less than fair value or they may cheat.

The Answer is D

haithamnimer · Answer

This is the conclusion by the owner:

if they change the payment method for only the coffee drinks, not other products  from  the regular one- paying bills through cashier-  to   - putting the charge customers wish in small cans- So, they will improve the net cash flow.

Below is the reply from the manager:

This plan will fail, as some people will pay for example 10 cents instead of 1USD (original price), considering that no one will catch them!!

So, we need an answer choice that even if some customers cheated, the profit margin will not effect!

(A) The new system if implemented, would increase the number of customers. --  No tie to the profit, if it will increase or decrease! 
 
(B) By roasting its own coffee, the shop has managed to reduce the difficulties and cost of maintaining an inventory of freshly roasted coffee. --  No tie to the profit, if it will increase or decrease!

(C) Many customers stay in the cafe for long stretches of time. --  No tie to the profit, if it will increase or decrease!

(D) The shop makes a substantial proﬁt from pastries and other food bought by the coffee drinkers.  Here, the coffee shop made their profit from other products other than coffer, thus, even if some customers cheat and not pay, this will not effect the profit. 
 
(E) No other coffee shop in the area has such a system.  No tie to the profit, if it will increase or decrease!

Coffee shop owner: A large number of customers will pay at least the

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Coffee shop owner: A large number of customers will pay at least the

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