Two years ago, the cost of the raw material

[Luci]

Whow, some of the 700-800 level verbal questions are really hard, at least for non-native as I am. At these leves little details make the difference.

Here is the question:

Two years ago, the cost of the raw material used in a particular product doubled after an earthquake disrupted production in the region where the material is mined. Since that time, the company that makes the product has seen its profit margins decline steadily. Aiming to improve profit margins, the company's head of engineering has decided that he must find a new source for the raw material.

Which of the following, if true, would cast the most doubt on the validity of the head of engineering's decision?

A- New competitors have entered the market every six months for the past two years, resulting in price wars that have progressively driven down revenues across the market.

B- Although the earthquake occurred two years ago, the region's mines have still not recovered to pre-earthquake production capacity.

C- There are several other regions in the world where the raw material is mined, but those regions do not produce as much of the raw material as the current source region.

D- The company could use a completely different raw material to make its product.

E- Recent advances in mining technology will make mining the raw material much more efficient and cost-effective in the future.


The correct answer is number A)

I had chosen number C) because the question asks about the validity of the head of engineering's decision, and the decission I think is:
"to improve profit margins, the company's head of engineering has decided that he must find a new source for the raw material"

In my opinion number A) does not cover that decision. Number A) talks about New competitors that make more difficult to increase profit margins, and that´s ok (it was my second option actually), but since I think the questions asks about finding a new source of raw material to improve those margins number C) talks about this and undermines the head of engineering's decision.


What do you think?

Thanks.

[cindyqtran]

The conclusion is to improve profit margin. A is the only one that is relevant.

[StaceyKoprince]

Two years ago, the cost of the raw material doubled, though note that the argument doesn't actually say whether this was temporary or if it is still true.

Since then, the company's profit margins have been declining and the company wants to improve the margins. The head of engineering concludes that the way to accomplish this is to find a new source for the raw material.

Logically this new source should be cheaper, though again the argument doesn't actually say that the head of engineering will look for cheaper raw material.

The head of engineering is assuming that the increased price for the raw material is the reason why the company's profit margins have been declining. If this isn't the case, then his conclusion is flawed.

A provides an alternate reason for the declining margins: competition. If competition is really the primary driver of the profit margin problem, then finding a new source for the raw material won't help, because the price of the raw material is not the problem. Note that A does not talk about making it difficult to increase margins - A specifically talks about reducing margins. The competition is driving prices downward and margins are calculated by taking revenues and subtracting costs. If revenues are being driven downwards, then margins are also being driven downwards.

C does not tear down the head of engineering's assumption. It doesn't matter that the other regions don't produce as much of the raw material - we can't assume that this fact means it's more expensive (or cheaper or the same price) in those other regions. Nor can we assume, say, that the other regions don't produce enough to meet the company's needs. The main region might produce 2 million tons a year and the other regions might produce 1 million tons a year. If the company only needs 1,000 tons a year, that's fine. We can't assume anything, in fact - it doesn't tell us anything.

[Gaurav]

Stacy ... I dont agree with A ....
You may well have alternate causes for profits declining ... But the engg. head wants to increase profits by reducing costs; profits = SP-CP ... If SP is continuously driven down by market forces as A states ... then the engg. head is fully PRUDENT in deciding to cut down CP by looking for alternate sources of raw materials .. if he could do this he would increase profits ...

Again there is nothing said about significant profit increase ... so we need not assume that raw materials contribute significantly to the cost of the product ...... just the fact that they do contribute is enough
(NOTE : You will find that GMAT propounded this same logic in a question where a car uses a special rosewood for its interiors and the price of rosewood increased implies price rise of car would reflect this..)


So A does NOT cast any doubt on the validity of the decision (that the engg head will increase profits by reducing RM costs)

Although am inclined to C ... again assuming lower production in other countries => higher price is not water-tight logic because price is a combination of demand-supply and nt just supply ...

But given to choose ... Id still say C ... because atleast it casts a doubt ... A does NOT cast a doubt on the validity of the decision ....

[StaceyKoprince]

We'll just have to agree to disagree then. But I can tell you that, if you use the same level of assumption on the official test, you'll get the problem wrong. You're not supposed to assume anything here - just go by exactly what you've been told. Don't try to view this as you would a real-world business problem you're trying to solve. That will only get you into trouble!

What you've been told is that the head of engineering assumes there is a connection between his company's flagging profit margins and the raw material but gives us absolutely no data to support his assumption.

Answer A addresses a reason why the engineering head's assumption might be wrong: there IS something going on to drive down revenues, and that something has nothing to do with raw materials. You don't have to assume anything here - it tells you flat out that there is something other than raw materials causing a problem with revenues. You know the formula for profitability: profits = revenues - costs. So if something's driving down revenues, that something is also driving down profits.

Answer C does not address revenues or profit margins or costs. The level of production in various regions does not have to have anything at all do with price - it might, but it might not. They haven't told you and you can't assume.

[goelmohit2002]

Hi Stacey,

Thanks.

The OE says:

"(C) The amount of raw material produced by other regions does not indicate anything about the cost of the raw material; it would be necessary to show that cost is not reduced in order to weaken the engineer's conclusion."

Shouldn't the highlighted above be "cost is reduced" in order to weaken.....

If cost is not reduced = cost is increased/same.....then IMO it is in line of reasoning with the Head to look for other sources where he can find cheaper stuff....

Please correct me if I am wrong....

Thanks
Mohit

[goelmohit2002]

Can someone please help in resolving one minor query....

Here Engineers decision = To look for some new sources of raw material.

Considering option E........

Please tell, if by using the new technology the cost of raw material(in the old region) to company reduces in future, then

i) Engineers decision is strengthened/weakened...who decided to look for sources somewhere else due to high cost factor. Let's say it reduces more than what Engineer was able to save by purchasing raw material from new sources.
IMO = weakened. (Please correct me if I am wrong)

Please tell, if by using the new technology the cost of raw material(in the old region) to company increases in future, then
ii) Engineers decision is strengthened/weakened...who decided to look for sources somewhere else due to high cost factor.
IMO = strengthened. (Please correct me if I am wrong)

[jigar24]

Hi Stacey,

While I agree with your solution for the most part, I still have a minor doubt. The term "margin" means absolute value of profits or percent profit??

IF it means the latter then (A) would become a wrong ans choice as revenues going down does not affect the % profit but the absolute value of profit. Thus margins still remain same.

Though total sales go down and so does the absolute value of profits, margins still remain same.

Please advise.

Jigar

[Ben Ku]

Shouldn't the highlighted above be "cost is reduced" in order to weaken.....

If cost is not reduced = cost is increased/same.....then IMO it is in line of reasoning with the Head to look for other sources where he can find cheaper stuff....

Mohit: The manager is assuming that by finding alternative sources of raw material, the cost will be reduced. So the manager's argument is weakened if we show that the cost is NOT reduced. Your line of reasoning may make sense: if current sources are more expensive, then they should look for new sources. However, (C) does not say these new sources are more or less expensive than the current sources.

Please tell, if by using the new technology the cost of raw material(in the old region) to company reduces in future, then

i) Engineers decision is strengthened/weakened...who decided to look for sources somewhere else due to high cost factor. Let's say it reduces more than what Engineer was able to save by purchasing raw material from new sources.
IMO = weakened. (Please correct me if I am wrong)

Please tell, if by using the new technology the cost of raw material(in the old region) to company increases in future, then
ii) Engineers decision is strengthened/weakened...who decided to look for sources somewhere else due to high cost factor.
IMO = strengthened. (Please correct me if I am wrong)

Mohit: We can restate the Engineer's decision this way - "If we look for new sources of raw material, then we can increase our profit margin." Although by using new technology, the cost may decrease and profit margins may increase, it does not strengthen or weaken the Engineer's decision to LOOK FOR NEW SOURCES.

While I agree with your solution for the most part, I still have a minor doubt. The term "margin" means absolute value of profits or percent profit??

IF it means the latter then (A) would become a wrong ans choice as revenues going down does not affect the % profit but the absolute value of profit. Thus margins still remain same.

Though total sales go down and so does the absolute value of profits, margins still remain same.

Jigar: I don't think it matters if we're talking about the absolute amount of profit or the % profit. The argument tells us that the Cost is going up. (A) tells us that the Revenue is going down. No matter how you look at it, this trend tells us that the profit margin (P = R - C, either absolute or percent) is shrinking. Now, the Engineer is hoping that by finding new sources of raw materials, the Cost would not increase (so it would stay the same or decrease). (A) says that even still, the revenue would decrease, so by changing the source of raw materials does not deal with the problem of decreased revenue.

Hope that helps.

[sudaif]

Ben and Stacy -

I will appreciate your help on this one as I still have a lingering question.

The way the passage reads, it is pretty clear that the Head of Eng's decision to look for raw material elsewhere to boost profit margins is PRIMARILY guided by the fact that the costs of mining the raw material from the existing site have increased. Correct?

If so, as the MGMAT official answer points out - in order to weaken the Head of Eng's decision, it must be that the Head of Eng will NOT be able to reduce costs by moving to a new site.

Answer choice A, talks about "lower revenues due to competition" --- the whole argument is predicated on "increased costs"
Therefore, I don't get why answer choice A is correct. If anything, I feel answer choice C, slightly weakens the Head of Eng's argument by suggesting that Head of Eng may not be able to find sufficient supply of the raw material elsewhere, and thus would have to pay the higher cost because he will have to extract from the disrupted site.

Stacey - you mentioned in one of your posts that on official questions the logic of answer choice A would prevail. If possible, can you point me to other Questions in OG that use similar logic? I am dumbfounded on this one.

Thx.

[jahnavi_p]

I went with C too initially and then after reading all the posts (posted by Stacy) I was trying to find a common reasoning pattern because the wording of the passage is such that one is led to believe that its the cost of the raw material which is the culprit.

On careful reading atleast 4-5 times, I came across some words which communicate Stacy's logic. Words as "cost of the raw material used in a particular product doubled". Since that time, the company that makes the product has seen its profit margins decline steadily. . Now if the cost of the raw material doubled, then the profits should have declined at one shot not steadily. So, there is something else which is responsible for the decline in the margins (which could be revenues).

Does it sound right?

[debmalya.dutta]

The argument that the company's head of engineering provides for declining profit margin is its relationship to the increasing cost of the raw material . So , we can weaken his argument by providing other reasons as to why there was a decrease in profit margins i.e competitors who are resulting in price wars and either pushing down the sale price of the product or decreasing the revenue..this is how I reasoned it...

Hence A

[sudaif]

jahnavi - i see what you mean. however, the overarching theme and main takeaway is the cost issue. I thought that is what one is supposed to focus on on CR questions, at least per MGMAT CR book.
Maybe Stacey can add some more color --- in terms of what to look for on such questions, especially the ones involving "profit"

[StaceyKoprince]

Good discussion, guys.

When we're asked to strengthen or weaken the conclusion, the focus is not ONLY on the conclusion. We also have to pay attention to the premise(s), or the reason(s) the author gives to reach that conclusion. The real focus of the answer is on that GAP between the two. (The same is true for assumption questions, by the way.)

Anything stated explicitly by the passage we should accept as true. It really is the case that the cost of the raw material doubled two years ago. It really is the case that, starting two years ago, the company's profit margins have declined steadily.

The argument does NOT say that those two things are linked, however. That is an ASSUMPTION, not a fact; we cannot assume that this is a fact.

This is the same assumption that the head of engineering is making in order to draw his conclusion - he IS assuming it is fact. But he may be wrong.

And, in fact, as deb pointed out, something doesn't quite add up here. The raw material cost doubled at one point in time, 2 years ago, but the profits have been declining steadily ever since. If this is all just due to the raw material cost doubling, then we should have seen the decline at that point in time and that's it. So something's already not quite right about this assumption and the head of engineering's thinking.

Now, here's my task. This is what the head of engineering thinks:

1. raw material cost doubled
2. profit margins declining
3. (assumption: those two things must be connected)
4. (assumption: we could get the raw material cheaper someplace else)
5. conclusion: we should find a new source for raw material.

We are then asked to find something that would cast doubt on the decision that the head engineer made. We can't change 1, 2, or 5; those things are given as fact. We can only attack #3 or #4 (or both, or other assumptions which I haven't thought of yet). Which answer choice undermines one of those assumptions?

Go check and think about that.

sudaif:

it must be that the Head of Eng will NOT be able to reduce costs by moving to a new site.

No, actually. It doesn't mean that he absolutely will NOT be able to reduce costs by getting raw materials elsewhere. On a weaken question, the correct answer only has to make it less likely that the conclusion is valid. The correct answer will not necessarily negate or completely destroy the conclusion.

Right now, the head engineer thinks that profit margins are declining because of the raw material cost. What if profit margins are actually declining because of some other cause? What happens to his plan then? It doesn't mean he absolutely CANNOT reduce his costs (and increase his profits) by following his plan. But it makes it less likely than it was before we knew that some other thing was actually the cause of the declining profit margins.

[saptadeepc]

Here is the question:

Two years ago, the cost of the raw material used in a particular product doubled after an earthquake disrupted production in the region where the material is mined. Since that time, the company that makes the product has seen its profit margins decline steadily. Aiming to improve profit margins, the company's head of engineering has decided that he must find a new source for the raw material.

Which of the following, if true, would cast the most doubt on the validity of the head of engineering's decision?

A- New competitors have entered the market every six months for the past two years, resulting in price wars that have progressively driven down revenues across the market.

B- Although the earthquake occurred two years ago, the region's mines have still not recovered to pre-earthquake production capacity.

C- There are several other regions in the world where the raw material is mined, but those regions do not produce as much of the raw material as the current source region.

D- The company could use a completely different raw material to make its product.

E- Recent advances in mining technology will make mining the raw material much more efficient and cost-effective in the future.


The correct answer is number A)

I got this one incorrect. I understand the reasoning behind option 'A' to be right.

I chose option 'E', and would like to understand the flaw in my reasoning.

What I dont understand is, even if there are new competitors, the company can STILL increase its production by means of alternate source ! Are we not assuming that even if the company employs new sources, itz profits will not increase ? And offcourse, we cannot assume that in future when the company employs alternate sources the competition would increase, it may not increase as well !

On the other hand, if we consider 'E' , we may think that the current mines, themselves will become more efficient and productive and therefore new sources, which may or may not be as productive as the mines are "after they become productive", cannot help to reduce profit margins.

Hence 'E' can give a reason to weaken the argument that alternate sources would help.

Ron or Stacey, please help me here !