Because postage rates are rising, Home Decorator magazine plans to max

Question

Because postage rates are rising, Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year. The quality of articles, the number of articles published per year, and the subscription price will not change. Market research shows that neither subscribers nor advertisers will be lost if the magazine's plan is instituted.

Which of the following, if true, provides the strongest evidence that the magazine's profits are likely to decline if the plan is instituted?

(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.

(B) The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles.

(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.

(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past.

(E) Production costs for the magazine are expected to remain stable

GMATNinja · Accepted Answer

Thanks  Masterscorp  for your explanation! I'll add my two cents...

The main concern here is rising  shipping  costs (postage rates). All else equal, if shipping costs have increased, then overall profits must have decreased. In other words, if revenues, production costs, and other costs have remained constant but SHIPPING costs have increased, then profits have decreased.

How can we can we decrease our shipping costs? By cutting the number of issues per year in half. That will immediately cut our shipping costs in half, even if, as stated in (E), production costs remain stable. So even if (E) is true, if we cut our shipping costs in half and revenue remains constant, we can boost our profits. Thus, (E) can be eliminated.

(D), on the other hand, tells us that if we cut the number of issues in half, then the our revenue from  advertising  will also be cut in half. Sure, we don't know what percentage of overall revenue comes from advertising, but this is  strong  evidence that cutting the number of issues in half will hurt our bottom line. (D) is a better answer.

I hope that helps!

vnigam21 · Answer

******GOOD QUESTION******

Because postage rates are rising, Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year. The quality of articles, the number of articles published per year, and the subscription price will not change. Market research shows that neither subscribers nor advertisers will be lost if the magazine's plan is instituted.

Thorough explanation of the above argument : --    
* Magazines Issue  is equivalent to a newsletter, publication, edition etc..
** Postage rate  is amount of money charged by a governmental postal service to ship and deliver mail.
 Scenario  - Suppose a magazine publishes 12  issues/publications/newsletters  per year, so now it will publish 6 issues/publications/newsletters per year. Reason - postage rates are rising, and Home Decorator magazine plans to maximize its profits.
 What about the other things??  Will REMAIN SAME. (The  quality  of articles, the  number  of articles published per year, and the  subscription price  will not change. )
  Alert  -  Don't confuse yourself with the difference between the issues and the articles. As I did when I first attempted this question.  
 Conclusion  - Plan is good.  Question  - Plan is bad??

Which of the following, if true, provides the strongest evidence that the  magazine's profits are likely to decline  if the plan is instituted?

CONCLUSION -- IF PLAN IS INSTITUTED, THE PROFITS ARE LIKELY TO DECLINE. Therefore, the plan is bad.

PROFITS = REVENUE - COSTS. 
i. Profits will decline if the COSTS GO UP SUBSTANTIALLY
ii. Profits will increase if the REVENUE GOES UP SIGNIFICANTLY

(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.  
This option is talking about the mailing costs;
 current postage rate  - $3
 new postage rate  - $4 (as per this option details)

Issues earlier (suppose as) - 10, therefore, Mailing cost -- 10*3 = 30
Issues now (will be half) - 5 -- Mailing cost -- 5*4 = 20
Thus, the cost is getting reduced itself. Therefore, the profits will increase instead, keeping the revenue same.

Explanation by RON,
they're only going to send out half as many issues. therefore, unless the cost of postage doubles, they're actually going to spend less money on postage than they did before.

choice (a) says that postage will cost only 1/3 more - far less than double. therefore, choice (a) actually implies that the total cost of postage will go down. this is exactly the opposite of what you want.

it may help to set specific numbers to the values in question.
let's say that they currently send out 10 issues per year, and that postage currently costs $3 per issue.
this is a total cost of $30 for postage.

if they cut the number of issues in half, to 5, than the postage would have to double (to $6/issue) to amount to the same total of $30.

if the postage increase is only 1/3, then the cost of postage per issue will only rise to $4. if only five issues per year are then sent out, the total cost of postage will fall from its original value ($30) to a new value of 5 x $4 = $20.

(B) The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles. 
The magazine's subscribers concerns are valid and they need to be rest assured that there will no loss of the current high quality, as it is directly mentioned in the argument that quality will not change. So, incorrect. Also, this does not proves why the plan is bad.
 
 (C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.  
 This option statement answers the what if scenario. But the subscription price will not change as per the argument. So we are not concerned about this scenario. Its irrelevant.
Also, this option does not proves why the plan is bad.

Options B and C are going against the facts mentioned in the argument itself. So, both of them are irrelevant.

(D) Most of the advertisers that purchase advertising space in the magazine will continue to  spend the same amount  on advertising per issue as they have in the past.  
 Home Decorator magazine’s profits would be likely to decline if, as a result of instituting the plan, revenues were to decrease substantially. Choice D indicates that the plan would produce substantially lower revenues because most advertisers will pay the magazine the same amount per issue, but there will be only half as many issues. Therefore, D is the best answer 
 Earlier Scenario - 
 No. of Issues per year  - 12
 postage rates per issue  - $3
 no. of advertising space purchased by advertisers per issue  - 10
 amount on advertising per issue earlier  - 1 * 3 * 10 = $30
 amount on advertising earlier  - $ (12 * 30) - $360

Current Scenario - 
 No. of Issues per year  - 6
 postage rates per issue  - $8
 no. of advertising space purchased by advertisers per issue  - 10 * 2 = 20 (as number of articles will still be the same, so it will double, as no. of issues reduced by half)
 amount on advertising per issue now  - $30  ( As per this option, its same as earlier ) 
 But calculation as per current scenario - 1*8*20 = $160  , 
 amount on advertising now  - $(6 * 160) - $960 (the amount which the advertisers needs to pay now, but they are paying the same amount as earlier.)
Thus this will result in a loss for magazine's profits. Thus, plan is bad and this is the correct option.

(E) Production costs for the magazine are expected to remain stable. 
 Profit = (Sales Revenue - Production Costs), just knowing the production costs we cannot comment on the profits. We need to know about the sales revenue as well to comment on the profit. We don't have enough information on the same. Incorrect.

walker · Answer

D

...Home Decorator magazine plans to maximize its profits  by reducing by one half the number of issues it publishes each year . .....

(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend  the same amount on advertising  per issue   as they have in the past.

Therefore, annual revenue from advertisement will halve.

prasannar · Answer

This is a clear D
(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.->  irrelevant, eliminate it 
(B) The majority of the magazine’s subscribers are less concerned about a possible reduction in the quantity of the magazine’s articles than about a possible loss of the current high quality of its articles.->  quality of articles would remain same so this is not an issue,eliminate it
 
(C) Many of the magazine’s long-time subscribers would continue their subscriptions even if the subscription price were increased.->  this would actually increase the profits, however increase of price is not the questions, thus irrelevant, eliminate it

(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the  same amount on advertising per issue  as they have in the past.->Thus if the company reduces the # of magazines per year to 1/2 then the company clearly loosed 1/2 of the revenue generated on the advertising,

(E) Production costs for the magazine are expected to remain stable.-> irrelevant, eliminate it

whamberto · Answer

The answer to this question is D:

The question stem is a little tricky because it is actually a weaken question, but the initial wording may appear to be a strengthen question.

A. If postage rates only increased by 1/3 and the number of issues is reduced by 1/2, this means that the company will still have cost savings. Therefore, this will not lead to a decrease in profits.

B. This is irrelevant. Whether individuals are concerned about quantity or quality of the magazine does not appear to affect the profits of the company.

C. This presents only a hypothetical situation. Therefore, we are not sure how this would actually affect the profits at all.

D. This is the correct answer. The reason is because if the advertising amount is the same per issue and the number of issues has decreased by 1/2, then the company is losing 1/2 the advertising revenue. This could result in decreased profits.

E. If production costs are stable, and the subscription price has not changed, there is no reason to believe that profits will change at all.

Superg8 · Answer

Hi 
I chose E . My reasoning was that if the production costs remained the same even with the number of issues reduced then how can the magazine make a profit

Masterscorp · Answer

We know from the initial statement that the revenue will remain constant. If the production cots remain constant as well we can conclude that the profit will stay the same. The question asks us to find an answer that shows why profits will decline . Therefore E doesn't give a reason why the profit should decline. Hope that helps

willacethis · Answer

Hi, can someone explain why option E is wrong? If we look at the equation "Profit per unit = Revenue per unit- Production cost per unit, we can see that if the per unit cost of production increases, then our per unit profit shall decrease.

Keeping this in mind, if the overall production cost remains stable (same) but the units produced are less, won't the per unit cost of production increase?

That would lead to lesser profit per unit and therefore, lesser overall profit.

Am I missing something?

GMATNinja   bb   VeritasKarishma

Posted from my mobile device

KarishmaB · Answer

You are assuming that fixed cost will remain the same. Production costs mentioned in (E) could very well be "cost per issue" which is expected to remain stable. If you really think about it, most costs of magazine production would be variable cost (amount paid to writers per article, cost of printing the magazine, cost of postage etc). These will be incurred when an issue is printed. 
The intent of (E) is to say that the costs are not going to increase.

(D) on the other hand, says that advertisers will spend the same amount per issue as before. So fewer issues will mean less revenue from advertisers. So even though advertisers will not be lost, there will be less money coming from them.

Answer (D)

CrackverbalGMAT · Answer

Because postage rates are rising, Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year. The quality of articles, the number of articles published per year, and the subscription price will not change. Market research shows that neither subscribers nor advertisers will be lost if the magazine's plan is instituted.

Which of the following, if true, provides the strongest evidence that the magazine's profits are likely to decline if the plan is instituted?

Question type:  Strengthen the argument

Conclusion:  The magazine will face losses if the number of issues is cut down by half.

Task at hand:  Find an option that shows that reducing the number of issues will cause loses.

A. With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.  That it costs more to mail wont be a problem because the number of issues that need to be mailed has been cut down by half.

B. The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles.  The concern of the subscribers will not help strengthen the conclusion.

C. Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.  If long-time subscribers would continue their subscriptions even if the subscription price were increased, then there will not be any losses.

D. Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past. Let’s suppose the advertisers spent $100 per issue and there were 12 issues originally.   That means, with the reduction in the number of issues, the magazine will only get $600. This is a loss for the magazine. This strengthens.

E. Production costs for the magazine are expected to remain stable  The fact that the production costs are going to be stable does not mean that the magazine will face losses.

- Nitha Jay

Raman109 · Answer

Understanding the argument -
Goal - Maximize profit. Profit = Revenue - Cost. How can we maximize profits? Either we increase revenue or reduce cost? How do we check that we have maximized our profit? If we have to make a revenue of $100 to make $1 as profit vs. another scenario if we can make a profit of $2 per 100 of revenue. The second scenario is preferred to maximize our profit for the given revenue. Profits/revenue may be a good yardstick to check if we have maximized our profits (for the sake of our understanding) other than the absolute numbers.

Plan - Reduce the number of issues by 50%.

So our job is to show that that the profits will decline. P = R-C. So profits can decline if revenues go down or cost increases.

Let's take an example -
Old Situation -
No. of magazines sold earlier - 100
Postage per magazine $6
So total postage cost = $600

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*100)+5000 = $7000

Profits = $7000-$600 = $6400

So our profitability is $6400/$7000 = 91.42%

Now, as per the new plan, we reduce the number of units by 50%
Scenario 0 - Advertisement revenue is fixed - Best case scenario.
No. of magazines sold now - 50
Postage per magazine $6 (same)
So total postage cost = $300

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*50)+5000 = $6000

Profits = $6000-$300 = $5700
So our profitability is $5700/$6000 = 95%

Scenario 1 - Advertisement revenue is fixed (To evaluate option 1 in the choices)
No. of magazines sold now - 50
Postage per magazine $8 (increase by 1/3)
So total postage cost = $400

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*50)+5000 = $6000

Profits = $6000-$400 = $5600

So our profitability is $5600/$6000 = 93.3% (The catch here is that since we reduced the postage cost by 50%, even if the postage cost increases by 33%, we still have a buffer of 17% to play, and while the profitability will be lower than the best case scenario, it'll still be higher than the old situation.

Scenario 2 - Advertisement revenue is per unit ($50 per unit) - To evaluate option D in the choices
No. of magazines sold now - 50
Postage per magazine $6 (stays same)
So total postage cost = $300

Revenue per subscription = $20
Advertisement revenue = $2500
Total revenue = (20*50)+2500 = $3500

Profits = $3500-$300 = $3200

So our profitability is $3200/$3500 = 91.42%

(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would. - If we compare the Old situation (91.42%) and Scenario 1 (93.3%). Scenario 1 is actually better (93.3%) in maximizing profits. We can't do this much in the exam, so another quick way is as we reduced the cost by 50% and now increased it by 33%, we still have a cushion of 17%. This will be a better situation. It's a strengthener and not a weakener that we are looking for.

(B) The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles. - But the argument says that the quality will remain the same. Distortion.

(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased. - The argument said that the subscription will remain the same. Distortion.

(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past. This is our Scenario 2 (91.42%). The absolute profits have not only reduced w.r.t. new plan (Scenario 0), but the profitability is also lower. As per the new plan, the profits should be $5700, but if advertising is per issue, the profits plummet to $3200. The trap words here in the argument are "Market research shows that no advertisers will be lost if the magazine's plan is instituted." But the deception here is okay; the number of advertisers can remain the same, but will their spending remain the same? That's what this option exposes.

(E) Production costs for the magazine are expected to remain stable - It's good if they remain stable. But if they are unstable, it'll likewise impact the old situation and new plans.

Let's plug the numbers for our understanding
Old Situation (including production cost)
No. of magazines sold earlier - 100
Postage per magazine $6
So total postage cost = $600

The production cost per magazine $5
Production cost for 100 magazines - $500

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*100)+5000 = $7000

Profits = $7000-$600-$500 = $5900

So our profitability is $5900/$7000 = 84.2%

Now, as per the new plan, we reduce the number of units by 50%
Scenario 3 - Advertisement revenue is fixed - Best case scenario.
No. of magazines sold now - 50
Postage per magazine $6 (same)
So total postage cost = $300

The production cost per magazine is $5
Production cost for 50 magazines - $250

Revenue per subscription = $20
Advertisement revenue = $5000
Total revenue = (20*50)+5000 = $6000

Profits = $6000-$300 - $250= $5450
So our profitability is $5450/$6000 = 90%

The new plan is still better as this option impacts both scenarios equally. At best, this is a distortion.

Now, is it required to do so many calculations in the exam? No way. But when we are practicing, let's get to the depth of the problem so that, hopefully, we can think in the right direction when we see such complex arguments.

SnorLax_7 · Answer

Hi  MartyMurray   KarishmaB   DmitryFarber

I was reading earlier explanations of Option A on How its a strengthener. is it really a strengthener ? only thing its saying is that Postage cost will be 1/3rd more. Keeping all things intact - SP, other costs, no. of copies sold (assuming half will be sold), this option just reiterating the fact that postage costs will be higher now (mentioned in stem as well). what will be its impact on profit is nowhere mentioned and cant be assumed either. That's my thinking.

Could you please highlight your reasoning to eliminate A ?

Thanks !

MartyMurray · Answer

Here's what the passage says:

Because postage rates are rising, Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year.

That statement provides two key pieces of information:

Postage rates are rising.

Home Decorator magazine plans to reduce by one half the number of issues it publishes each year.

Now, here's (A).

(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.

Notice that this choice presents a comparison of the cost "with the new postage rates." So, the "one-third more" is a comparison of the cost under the new rates of mailing one of the new-style issues with the cost under the new rates of mailing one of the old-style issues.

So, this increase is not the same increase mentioned in the passage. This increase is the result of mailing fewer issues with the same total number of articles. Presumably, the reason for this difference is that each issue will be heavier under the new plan and thus cost more to mail. So, this choice provides new information. Thus, we can't eliminate this choice for the reason that it provides no new information.

So, how can we eliminate this choice.

Well, the passage says that Home Decorator magazine plans to reduce by one half the number of issues it publishes each year. If one-third more is spent on half the issues, the total will be be lower. After all, 1 1/3 * 1/2 < 1.

So, this choice indicates that the plan will enable the magazine to save money, and thus, if anything, indicates that the plan will result in an increase, rather than a decline, in profits.

sriramsundaram91 · Answer

You won't be able to find the answers if you don't critically read the passage.
GMAC again proving that every word in the stimulus is to be carefully treaded.

Now you may ask which word in this passage?
Exactly! - "  Market research shows that  neither  subscribers  nor   advertisers  will be lost if the magazine's plan is instituted"
And you also have to read this sentence that " Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year"
Closely look at these words maximize its profits by reducing the number of issues by one half i.e. 12 magazines to 6 magazines per year.

But if you are paid by advertisers based on per issue of magazine, and number of issues is reduced your income is reduced, you have also not increased the subscription price, therefore you will be in loss. 100% all other choices are eliminated.

Because postage rates are rising, Home Decorator magazine plans to max

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Because postage rates are rising, Home Decorator magazine plans to max

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