In principle,gross margin,the difference between the customer sales pr

Question

In principle,gross margin,the difference between the customer sales price of the product and the cost to manufacture the product,on a product is directly proportional to the R&D investment the company makes. However,the same does not hold true with Nokia and Apple,who compete in the cell phone market. Nokia spends 3 times on R&D as much as Apple does but earns substantially lower average gross margins on product sales.

Resolve the paradox.

(A) Nokia spreads the R&D across multiple product lines, whereas Apple sells its products only in one product line, the one with the highest margins.

(B) Apple uses more contractors than Nokia does for production.

(C) Nokia pays its engineers about the same as Apple does, but provides them with better benefits.

(D) Apple sells direct and therefore has lower sales overhead than Nokia does on products.

(E) Nokia's CEO's pay is higher than that of Apple's CEO.

Cefloresm · Answer

I would say D and not A. The principle does not specify if the R&D has to be done on multiple lines or on a specific product. On the other hand, Apple's business model reduces overhead costs, which also have an impact on gross margins.

Does someone also think this way?

Regards,

Does someone also think this way?

Regards,

Cefloresm · Answer

In the end it was A hehe. Can someone please explain the logic behind it?

Thanks.

risehazy05 · Answer

I believe this is because A addresses the line of reasoning. A talks about R&D itself which successfully resolves the paradox. D maybe true but doesn't talk about R&D so it doesn't have an impact on the paradox.

snigdha3108 · Answer

I marked D............. my approach was the same as yours.

ArvindVaishnavK · Answer

I also went for D but it has no reasoning to support.

MakB · Answer

Bunuel  Could you pls clarify, why not D?

AbhishekP220108 · Answer

Hi  MakB  let me try to help

Lets look at the argument

In principle,gross margin,the difference between the customer sales price of the product and the cost to manufacture the product,on a product is directly proportional to the R&D investment the company makes.- In general Principle was introduced where GM=K X Cost(R&D)

However,the same does not hold true with Nokia and Apple, who compete in the cell phone market.- Author concludes this principle doesn't hold true for these 2 products who are in same market, Ok why?

Nokia spends 3 times on R&D as much as Apple does but earns substantially lower average gross margins on product sales.

Apple R&D cost=100, GM=higher Avg GM

Nokia's R&D=300, GM= Lower Avg GM

Whereas, according to the principle, Lower R&D Cost, lower Avg GM and Higher R&D cost, Higher Avg GM. So we have to find what is causing this differene in GM
 
 Resolve the paradox.

(A) Nokia spreads the R&D across multiple product lines, whereas Apple sells its products only in one product line, the one with the highest margins.- It resolves the doubt, because it gives us the reason what led to Nokia's High R&D, Low GM

(B) Apple uses more contractors than Nokia does for production.- Difference in contractors, so what.

(C) Nokia pays its engineers about the same as Apple does, but provides them with better benefits.- Doesn't relate the GM and R&D

(D) Apple sells direct and therefore has lower sales overhead than Nokia does on products.- It doesn't give us info why R&D was high and GM was low

(E) Nokia's CEO's pay is higher than that of Apple's CEO.- It will not create much of difference.

Hope this helps.

MakB · Answer

Oh okay. So basically D tells why apple has more profit and doesnt talk about R&D. While the question asks for GM in realtion to R&D. Got it.
Thanks much!!

egmat · Answer

Hi ArvindVaishnavK,

Good question — let me show you exactly why D falls apart.

The key  is in the stimulus's own definition of  gross margin : 'the difference between the customer sales price of the product and the cost to manufacture the product.' Read that carefully — it's sales price minus manufacturing cost. That's it.

Now look at what D says: 'Apple sells direct and  therefore  has lower sales overhead.' Sales overhead (distribution costs, sales team salaries, etc.) is  NOT  part of manufacturing cost. Sales overhead affects operating profit or net profit, but it has  zero  impact on  gross margin  as defined in this problem. So D  addresses the wrong metric entirely  — it cannot resolve a paradox about gross margins.

Now look at A: Nokia spreads its R&D across multiple product lines, while Apple concentrates on just one — the highest-margin one.  This directly resolves the paradox.  Even though Nokia spends  3x  more total on R&D, that spending is diluted across many product lines (some high-margin, some low-margin). Apple pours all its R&D into a single high-margin product line. So Apple's average  gross margin  ends up higher despite lower total R&D spending. The principle (more R&D = higher margins) still holds per product line — Nokia just averages down by competing in lower-margin segments too.

Key takeaway:  In paradox questions, always anchor your reasoning to the exact definitions and terms given in the stimulus.  Here, the stimulus defined  gross margin  precisely — and D introduced a concept (sales overhead) that  falls outside that definition .

Answer: A

In principle,gross margin,the difference between the customer sales pr

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In principle,gross margin,the difference between the customer sales pr

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