Gally is aiming at starting a new business that offers annual contract

Question

Gally is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries. These contracts will include services such as rebalancing, repairing the bearings, replacing the pump impellers as they wear out etc. Since Gally is a newcomer, it aims to gain market by offering contracts at reduced prices. Gally's management raises concerns that the revenue from these contracts will not be enough to cover their costs.

The answer to which of the following questions would help evaluate the management’s concerns?

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions

B. Whether Gally can acquire similar number of contracts without reducing its prices.

C. Whether Gally offers premium services that others charge at standard prices, at a very low cost.

D. Whether Gally targets refineries that are flush with money and can pay for repairs.

E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs.

mysterymanrog · Answer

E is not relevant to the argument at hand. How would a cost estimate be useful in knowing if the revenues from the contract would be enough to cover the costs? It is already known that the maintence costs would be quite expensive, and if the firm needs to cover those costs they would likely incur a loss.

A is a far better option - if the firm is able to acquire clients that require few repairs, then the reduced contract costs might not be a problem. If the opposite is true, then it might be a problem.

Hope that helps!

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RohitKakkar · Answer

Premise-1 :- Gally is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries.
Extra Info:- These contracts will include services such as rebalancing, repairing the bearings, replacing the pump impellers as they wear out etc.
Premise-2: Since Gally is a newcomer, it aims to gain market by offering contracts at reduced prices.
Mgmt Concern:- Gally's management raises concerns that the revenue from these contracts will not be enough to cover their costs. 
We need to evaluate whether their concerns are true or not

A) Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance action. If this is true then mgmt concern is false as they will save money and this is a good way of making money and gaining market share, If this is false then mgmt's concerns are true and they will not be able to cover their costs, Keep it.

B) Similar number of contracts won't solve their issue, Its not a high volume low margins game in management terms.

C) Premium or not, is not related to the passage

D) Refineries can pay the money but it is about the company that we are concerned

E) Can be a TRAP answer on the face of it, But records or no records the company will not be able to take out the money and cover its cost

A is the winner here

ANKITK13 · Answer

- B can be a promising answer "Whether Gally can acquire similar number of contracts without reducing its prices." as management can get similar type of contract in other firms at original prices but here, they need to come down the rates to gain the market which shows clear loss.

RohitKakkar · Answer

Let's say they are able to get the record and have calculated average cost but do remember they have to sell their contracts at lower price so the management's concerned is not being answered here

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wadhwakaran · Answer

Conclusion : The revenue from these contracts will not be enough to cover their costs.

Basis : Gally is planning to gain contracts at reduced prices.

Gaps : What if Gally did not have to give enough services that exceeds the cost of their revenues?

A. Whether Gally can target new refineries, such as those built in the last 15 years with pumps that require fewer and relatively inexpensive maintenance actions  The answer to this question can be a YES (this means that their expenses will be less than estimated) or a NO (this means their expenses will be roughly equal to the estimate). YES breaks the conclusion and NO makes the conclusion.

E. Whether Gally targets refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs.  YES the Gally can target refineries where there is well documented repair records then this means the estimate of Gally will certainly go true. NO the Gally cannot target refineries where there is well documented repair records then this means the estimate of Gally may or may not go true. This neither breaks nor makes my conclusion. Therefore, this option does not fit the bill

akshatv45 · Answer

Revenue = No. of Contracts * Price of contract
Cost = Cost of maintenence and repairs.

Conclusion : Revenue < Costs

Assumption:
1. No. of contracts will not be able to offset the costs
2. Costs will be so much significant that discounted price per contract will be not able to cover for the costs.

Option A is in line with Assumption 2. Hence, A is a valid choice.

VerbalBot · Answer

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Gally is aiming at starting a new business that offers annual contract

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