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Head of Engineering

by goelmohit2002 » Tue Aug 04, 2009 7:58 am
Hi All,

In the below question, the OA = A.. But for kicking out C...the reasoning that OE gives is that:

"(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 sources of material...in order to reduce the cost and consequently margins....

Please tell what I am missing here....



===========================================

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.
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by iamjakekim » Tue Aug 04, 2009 8:04 am
I guess C is out since the head engineer already consider replacement for its new material??

I came up with A !!
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by goelmohit2002 » Tue Aug 04, 2009 10:39 am
Hi,

Can someone please tell....the engineer decision to look for new raw material source....is weakened in which of the following scenarios:

1. If the alternate plan = does not reduce the cost.
2. If the alternate plan = reduces the cost.
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by ogbeni » Tue Aug 04, 2009 11:34 am
goelmohit2002 -

Many times, when you have a weaken type question in cause and effect arguments, the answer is usually found in an alternate cause . Here the Head of Engineering attributes the decline in profits to cost of production. So the HOE's reasoning goes

Cause (increase in cost of production) --> Effect (Lower profit margins). With option A, though, the alternate cause of Lower profit margins is Price Wars due to new entrants who push prices down.

C actually strenghens the HOE's reasoning. Think about it, the cost of production went up because of disruption in process i.e. the raw material is now more scarce. Now if other regions in the world do not produce enough, the raw material is scarce in general and the HOE's cost reasoning is justified.

Hope that makes sense
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by goelmohit2002 » Tue Aug 04, 2009 11:38 am
ogbeni wrote:goelmohit2002 -

Many times, when you have a weaken type question in cause and effect arguments, the answer is usually found in an alternate cause . Here the Head of Engineering attributes the decline in profits to cost of production. So the HOE's reasoning goes

Cause (increase in cost of production) --> Effect (Lower profit margins). With option A, though, the alternate cause of Lower profit margins is Price Wars due to new entrants who push prices down.

C actually strenghens the HOE's reasoning. Think about it, the cost of production went up because of disruption in process i.e. the raw material is now more scarce. Now if other regions in the world do not produce enough, the raw material is scarce in general and the HOE's cost reasoning is justified.

Hope that makes sense
Yes,...Thanks... I agree that A is the best....but the reason for kicking out C as given in OE was not convincing (atleast to me)...can you please look into the same in my original post...

Also kindly tell...

The engineer decision to look for new raw material source....is weakened in which of the following scenarios:

1. If the alternate plan = does not reduce the cost.
2. If the alternate plan = reduces the cost.
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Re: Head of Engineering

by ogbeni » Tue Aug 04, 2009 12:01 pm
goelmohit2002 wrote:Hi All,



"(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 sources of material...in order to reduce the cost and consequently margins....

Please tell what I am missing here....
First, remember Profit = Revenue - Cost. So there are many reasons why your profits may decrease if you manipulate either (a) Revenue or (b) cost.

Second, I think it is key to focus on what you are trying to weaken. What you are trying to weaken is Increase in cost has led to a reduction in profit margin . To be even clearer you are trying to weaken the cause because the effect is a fact. If cost has remained the same then why would Profits go down?

Third, the OE states that "it would be necessary to show that cost is not reduced in order to weaken the engineer's conclusion." This makes sense because based on my 1st paragraph (profit equation), if you weaken the Cost reason then a revenue reason has to be the cause of a reduction in profits.

Finally, if you state that 'costs are reduced' then you have increased profit margins and not decreased profit margins!! :). You cannot make the effect the opposite. Hope I haven't confused you
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by gmatguy16 » Tue Aug 04, 2009 3:25 pm
no one in the forum thinks the oa is E,if not maybe i am just confused.
the decision was to find new source for the raw material,to weaken that we must try to prove that it is not necessary to find a new source of raw material...why wont we look for new source..only if recent advances in technology make mining the material cost effective using the same source.. usually due to an earthquake we need to dig deepeer for minerals..earthquake does not change the quantity of minerals in a mine...so why not E ??
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by goelmohit2002 » Tue Aug 04, 2009 9:02 pm
gmatguy16 wrote:no one in the forum thinks the oa is E,if not maybe i am just confused.
the decision was to find new source for the raw material,to weaken that we must try to prove that it is not necessary to find a new source of raw material...why wont we look for new source..only if recent advances in technology make mining the material cost effective using the same source.. usually due to an earthquake we need to dig deepeer for minerals..earthquake does not change the quantity of minerals in a mine...so why not E ??
IMO because less cost to supplier does not mean that he will charge less to the company under discussion....he may increase/decrease/keep the same cost.....on which company has no control....
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Re: Head of Engineering

by goelmohit2002 » Wed Aug 05, 2009 12:50 pm
ogbeni wrote: Second, I think it is key to focus on what you are trying to weaken. What you are trying to weaken is Increase in cost has led to a reduction in profit margin . To be even clearer you are trying to weaken the cause because the effect is a fact. If cost has remained the same then why would Profits go down?
Hi Ogbeni,

Yes, you have really confused me :)

Can you please tell which of the following two is the correct interpretation of Original Explanation ?

a)it would be necessary to show that cost is not reduced [by engineers plan] in order to weaken the engineer's conclusion.
b) it would be necessary to show that cost is not reduced [by alternate plan] in order to weaken the engineer's conclusion.

Thanks
Mohit
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by goelmohit2002 » Wed Aug 05, 2009 1:06 pm
Can someone please tell, the below fact strengthens or weakens the Engineers plan to search for cheaper raw material source ?

Before Earth Quake:(say in 2007)
==============
Selling Price of the material = 100
Raw Material cost(assuming only one raw material) = 70
Margins = 30.

After Earth Quake Presently (2009)
=======================
Selling Price of the material = 100
Raw Material cost(assuming only one raw material) = 80 (note that cost is increased)
Margins = 20.

If the above strengthens, then why we have to show that cost is increased(i.e. not reduced)....in order to weaken.....IMO it should be used to strengthen the Engineers plan....
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by scoobydooby » Thu Aug 06, 2009 5:02 am
engineers decision: to look for a new source of raw material to improve profitability

to weaken validity of engineers decision, we must show that finding the new source of raw material will not improve profitability

A does that. A says: price wars due to competition have caused revenues to decrease impacting profitability. it addresses the revenue driver of profitability. even if a new source of raw material is found, price wars will keep revenue and hence profitability down

C is kind of out of scope i guess. we do not know if the company needed for its use all the raw material produced in the current mine to say with conviction, the new sources will fall short of the company's demand
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by goelmohit2002 » Thu Aug 06, 2009 6:17 am
Edited - Deleted Since wrongly posted.
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by scoobydooby » Thu Aug 06, 2009 9:17 am
goelmohit2002 wrote:Hi,

Can someone please tell....the engineer decision to look for new raw material source....is weakened in which of the following scenarios:

1. If the alternate plan = does not reduce the cost.
2. If the alternate plan = reduces the cost.
note it says: "Aiming to improve profit margins, the company's head of engineering decided to find new source.." the bigger objective is to improve profitability. it is assumed that the new source would decrease costs and improve profitability.

both 1) and 2) would weaken if the profitability does not improve.
2) would also weaken if the reduction in cost is not able to improve profitability. (akin to winning the battle, losing the war)

here, 2) comes into play. even though the cost may be reduced by exploiting a new source, the revenues will be driven down due to the price wars, the profitability (which is the main objective) may not improve.
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by goelmohit2002 » Sat Aug 08, 2009 11:20 am
Thanks Scooby for the previous clarifications:

Just one minor query....

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

Just once consider option E........

Can you 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)

Can you 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)


Thanks
Mohit
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by scoobydooby » Mon Aug 10, 2009 10:06 am
E says mining will become more efficient and cost effective in future.

we do not know if the company mined its own raw material or how the decreased costs of mining will affect the company. it could well be that the company bought it from a mining company, the mining company may/may not pass on the benefit of low mining costs to the company.
E seems kind of out of scope.
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