Two years ago, the cost of the raw material

[jnelson0612]

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 !

I'm going to quote Ben Ku from up above:
"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."

[gurvindersingh2004]

I came across this question in an mgmat cat .
I have read staceys explanation and have found that option can be assessed in 2 ways
1) We see A as providing an alternate conclusion for the decrease in profits .
From this line of reasoning , the answer choice seems to be a valid weakener
2) The second line of reasoning is that we consider the answer choice keeping the conclusion in perspective .
The conclusion states that the head of eng. will be able to increase the profit by looking for an alternate source of the raw material .
what in the option A suggests that the head of engineer will not be able to increase profits by looking for a cheaper source of raw material .
I agree that the profits may diminish in the due course of time because of the pricing wars. But at least for a short period of time , the strategy of looking for a cheaper source will increase the profit margin for a short while.

[tim]

looking for another source is only a valid strategy if the raw material can be gotten more cheaply from a different source. while the argument implies that this may be the case - it sets up an assumption that it could the earthquake at the current source that is squeezing profit margins - A pretty much overpowers this assumption with a completely different and more compelling reason why the profit margins could have been so low. and if that is the case, finding a different source for the raw material won't necessarily help. notice that there is NO mention of the possibility that the material can be found more cheaply elsewhere..

i notice your explanation specifically ignores long-term gain in order to focus on a short term profit. try that suggestion in the real world after you've graduated from business school and let us know how that works out for you.. :)

[hamed.dadgour]

I think (A) is incorrect. In the GMAT world, we can not tie an argument about "revenue" to a conclusion about "profit margin". We do not know anything about the cost of manufacturing. There is no way to justify (A) without making "external" assumption about the cost.

[jnelson0612]

I think (A) is incorrect. In the GMAT world, we can not tie an argument about "revenue" to a conclusion about "profit margin". We do not know anything about the cost of manufacturing. There is no way to justify (A) without making "external" assumption about the cost.

Sorry, I'm not sure what you mean about the cost of manufacturing. Answer choice A doesn't even address that. Also, please know that the GMAT *does* like to address revenue and profitability. They use the formula profit=revenue - cost on a few problems. I don't think that's very relevant to this problem, so this is just a side note.

I have posted the question and answer choice A here to help us refresh our memory:

"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."

So let's review:
Conclusion: the company must find a new source for the raw material
WHY?
Premise: A raw material is used to make a company's product. The raw material's price has doubled since an earthquake disrupted the supply. Since then, the company's profit margins have decreased.

So the executive is assuming that the increased cost of the raw material is what is causing the profit margins to be decreased. If that can be fixed the profit margins will be fine.

We want to weaken this idea. One way to do that is to show that there is another cause for the lower profit margins that has nothing to do with the price of the raw material.

Now, check out A. A gives another possible cause for the situation at hand--increased competition. If increased competition is the reason for the lower profit margins, getting the raw material cheaper isn't really going to help me.

Please let us know if we can elaborate further.

[subrat308]

I have a doubt on A choice -It tells about that revenue has gone down, but will that ensure that profit margin will be affected by the revenue?

It may so happen that cost also has gone down and the profit margin still constant.

IMO the choice A does not substantially weaken the argument.

[jnelson0612]

I have a doubt on A choice -It tells about that revenue has gone down, but will that ensure that profit margin will be affected by the revenue?

It may so happen that cost also has gone down and the profit margin still constant.

IMO the choice A does not substantially weaken the argument.

Only two aspects affect how much profit we make: the amount we take in (revenue) and the amount that goes out for expenses (costs). Changing either of those affects profit.

Now, you are suggesting that maybe cost has gone down so the profit margin is unaffected even though revenues have also gone down (in choice A). Please keep in mind your goal here: you're trying to weaken the idea that by lowering costs we will restore our profit margin. We want to say that lowering costs will NOT be good enough to give us the same profit margin.

What scenario is going to give us reduced profits even with lowered costs? The only scenario that will give us that is lowered revenues. I have to say that lowering costs will not be enough to restore our profitability because revenues are decreasing too. That's what answer choice A does.

Does this make more sense?

[devashish.maheshwari]

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.

I got the answer correct but I was just wondering, shouldn't the bold part be 'aimed at improving' instead of 'Aiming to improve'?

[jlucero]

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.

I got the answer correct but I was just wondering, shouldn't the bold part be 'aimed at improving' instead of 'Aiming to improve'?

No, because it is referring to the person doing the aiming, not the thing being aimed at:

Aiming at the target, the archer let the arrow go.
Aimed at the target, the arrow hit the bullseye.

[garryrother]

Hi MGMAT Folk,

Thanks for the high quality questions.
As for this question, I am not entirely convinced withe correct answer; However, I still chose A since other choices were infested with bigger loop holes than choice A is.

In my opinion, the question can reconcile differential opinions if the following "Aiming to improve profit margins" is replaced with "Aiming to improve profit margins to that of pre-earthquake level".
Assume, that the present cost of raw material is $10/unit. The manager's thoughts that finding for new source of raw-material(and surely cheaper than the existing one) will improve profit margins are justified. Since the price of the raw material from the new source will be <$10/unit the profits will certainly increase. We are comparing the new to be profits with existing ones. The effect of "new competition" will be alike in both cases, hence they can be ruled out.

Let me know what you think.

Thanks,
Garry

[neeha.g1588]

Dear MGMAT staff,

I am really not convinced by the reasons discussed for the 'A" to be the ans.

Please correct my understanding

> The profit margin gradually reduced....
> raw material are now twice as costly
> INCREASE PROFIT MARGIN

Even if competition is driving the company to reduce the end price n in turn reducing the profit margin, looking for a alternate raw material source will surely increase the profit margin..

The question is only about profit margin.....The fact that other companies are playing role in price reduction is having no effect on the intention of engg to increase profits by exploring new materials.

A doesnt address the issue, as A being true or false will not effect the intention stated.

Hence , A is not the ans.

[jlucero]

Let's take a look at the assumption being made in this argument:

Cost of X went up
Profit margins went down
Therefore we need to get a new source for X.

The assumption here is that the profit margins going down were caused by the cost of X going up. But could it be that profit margins going down were (also) caused by something else? This is a case of causation vs correlation. Two things happened at the same time does not guarantee that one is caused by the other.

Notice Garry and Neeha, that each of you are looking for a different assumption or different scenario. Remember that most GMAT arguments have several flaws in them. You can say that answer A isn't addressing your particular flaw/assumption. But if it attacks one of the flaws, it can still weaken the conclusion.

If new companies are flooding the market, changing the source of material you are using might not matter. It doesn't GUARANTEE that the manager's plan is not going to work. But it does hurt his plan more than any other answer choice does.

[mcmebk]

Even though I am unable to think of any specific examples, to me option A resembles those typical "irrevalent" answers in GMAT.

Which means, the competition from new suppliers might be contributing to the decrease of the margin, but it is not irrevalent because the argument is only about the relationship between "Cost of raw material - decreased margin - to improve margin - to look for alternative source".

Does this look familiar to you? We see wrong answers like this one very often - "Introduction of new technology will improve our yield and reduce cost, thus we should introduce new technology, one correct answer to weaken this question would be the introduction requires many hours of training and people often choose to leave the company after receiving the training, rather than options such as "company D used a new management tool and reduced its cost greatly".

Answer C, not only correctly reflects the relationship between "margin" and "finding resources", but also made a strong indication to weaken the argument. As explicitly suggested in the passage without any assumption, lower capacity = higher price, it can be inferred that by seeking other resources will only increase the cost on raw materials and thus reduce the margin, argument is weakened.

[jlucero]

Without a doubt, A is a difficult answer choice, but it's still much more relevant than answer choice C. Put yourself in the shoes of the head of engineering. You are wanting to find a new source of a raw material in order to improve profit margins. What would matter more to you? The fact that other places don't mine as much of a raw material as the place you currently collect your raw material? Not necessarily. Maybe each of the other mining locations only collect 80% of the mine you usually get your material. But being able to collect that material from several other mines that aren't having disrupted production could equal or even surpass the raw material you are currently able to get.

What's far more important here is that your entire conclusion may be built on faulty logic. You are equating two events that happened around the same time (correlation) and stating that one must be responsible for the other (causation). If this is true, which is what A states, than this is quite relevant to your entire conclusion and would negate the possibility that finding another source of raw materials will NOT allow you to improve profit margins.

[harika.apu]

Without a doubt, A is a difficult answer choice, but it's still much more relevant than answer choice C. Put yourself in the shoes of the head of engineering. You are wanting to find a new source of a raw material in order to improve profit margins. What would matter more to you? The fact that other places don't mine as much of a raw material as the place you currently collect your raw material? Not necessarily. Maybe each of the other mining locations only collect 80% of the mine you usually get your material. But being able to collect that material from several other mines that aren't having disrupted production could equal or even surpass the raw material you are currently able to get.

What's far more important here is that your entire conclusion may be built on faulty logic. You are equating two events that happened around the same time (correlation) and stating that one must be responsible for the other (causation). If this is true, which is what A states, than this is quite relevant to your entire conclusion and would negate the possibility that finding another source of raw materials will NOT allow you to improve profit margins.

Hello Joe,
I have a doubt in option A
it says there is other reason for profit margins to decline .
But can i assume the same(new competitors entering market to happen in future also ) ?
Is it needed that i need to assume the same to happen in future or is it just enough to show that there was other reason in the past two years that caused profits to decline

Thanks:)