CR 500 # 1

veekay · Posted: Thu Sep 06, 2007 6:00 am Post subject: CR 500 # 1

Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.
Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?
(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

Nisha1218 · Posted: Thu Sep 06, 2007 7:22 am Post subject:

I think the answer is A because the rest of the answer choices seem out of scope.

sochatte · Posted: Thu Sep 06, 2007 11:47 am Post subject:

A should be the ans.

gviren · Posted: Fri Sep 07, 2007 12:43 pm Post subject:

OA is D

Nisha1218 · Posted: Fri Sep 07, 2007 6:40 pm Post subject:

Why is it d and not a?

ri2007 · Posted: Sun Sep 09, 2007 4:14 pm Post subject:

veekay can you pls confirm the ans.

I feel the ans should be A. It points out a key limitation of using the method above for evaluating the financial benefit of new manufacturing processes. i.e if you make a mistake in your estimation of the material cost it will result in a wrong decision.

I would not agree with D as the method already takes into consideration the selling price and the market share before taking the decision.

veekay · Posted: Sun Sep 09, 2007 6:29 pm Post subject:

ri2007 · Posted: Sun Sep 09, 2007 9:49 pm Post subject:

well then I have to repeat what Nisha1218 said - why d not a?

can any one explain?

thanks

samirpandeyit62 · Posted: Mon Sep 10, 2007 12:05 am Post subject:

IMO D should be the answer coz its most rational one & direclty related

Q asks us "constitutes the most serious disadvantage for companies of using the method above for evaluating the financial "

i.e any answer choice which challenges this method should be correct.

Now here the CR clearly tells us that the companies "often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant."

so cost of investment is not compared only results of it, although it would definately matter, but when we talk about results, it may be something like a GRAPH plotting costs, SP's & market share according to scope of the CR, however,we cannot say for sure that the projected results also highligh the investments in the processes.

Even if they were, choice A only highlights cost of materials, but a process is made up several things not material alone. So we cnnot assess the risk.

Also D is not out of scope as Competitiors come into picture as soon as u discuss about market share, as my market share is nothing but
100 - % share of my competitors

Now Choice D is perfect, it directly attacks the method mentioned in the Q , we can say that companies compare two graphs (hypothetically)
a) with projected results after investmenst
b) alternative resulst of not making the investment with costs, selling prices, and share of market remaining constant.

so the metod can be summed up as

"compare two graphs and show that the first one does not affect second"

so the method is based upon the reasoning that graph a can be anything supposedly positive but it would not affect graph b

Now D says that

Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.

If this a true risk then , it clearly relects that the graph b would be affected by graph a as maket share will increase rather than remainig constant.

Pardon me, but I think reasoning was pretty simple.