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Newtronix, a technology company

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Newtronix, a technology company

by gmatdriller » Sun Oct 14, 2012 6:36 am
Newtronix, a technology company that sells only one product, recently raised prices on its signature product, the ePod. Analysts had predicted that increased prices would translate into higher profits for Newtronics. However, Newtronix saw its profits decline after the price increase.

Each of the following, if true, is convincing as an explanation for the decline in Newtronix's profit EXCEPT

A; Newtronix's market share has declined since the price increase.
B: A recent patent dispute led to the ban of sales of ePods in several countries.
C: Materials necessary to the production of a necessary component of the ePod recently went up in price.
D: The average customer purchased fewer ePods as a result of the price increase, while the number of customers purchasing ePods remained the same.
E: The government imposed higher taxes on Newtronix just prior to the price increase.

Source: Manhattan CAT 3; OA A

How does A differ from D? if a market share shrinks, whether by a wide or narrow margin, won't that lead to a loss of revenue? Or is it the rate of decline that makes more sense here?
Last edited by gmatdriller on Sun Oct 14, 2012 1:06 pm, edited 1 time in total.
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by vikram4689 » Sun Oct 14, 2012 8:33 am
don't know what kind of reasoning is implemented here by MGMAT. it seems that that whole point of discussion leverages on the interpretation of "convincing as an explanation" element.

If MGMAT reasons that reducing of market share may or may not mean reduction in profit as at the same time prices of products increased, then that kind of uncertainty is present in other options as well.

B - we can call this as convincing as "several countries" is mentioned
C - uncertainty exists, what if increase in price of essential component is $1 and increase in price of product is $10. since nothing extreme is mentioned, as in option B, we cannot conclude anything about extremeness and hence uncertainty exists
D - uncertainty exists, what if less sales is overwhelmed by increase in price of each product
E - uncertainty exists, increase in tax can be easily much less than increase in price. E does not say huge amount of taxes were levied on the company

Can you share the explanation given by mgmat and why did you not question options other than E
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by gmatdriller » Sun Oct 14, 2012 2:53 pm
i intend posting OE after contributions from others. Meanwhile, I need clarifications on why D is wrong and A correct.
Both options, I believe, lead to a decrease in revenue.

Part of the detailed OE:

(3) State the Goal

We need to find four answer choices that could explain a decrease in profits and select the remaining option. Profit is calculated as revenue minus costs, so any direct increase in costs or decrease in revenue will tend to lower profits. We are looking to eliminate any options that increase costs, decrease revenue, or have no definite connection to either factor.

(4) Work from Wrong to Right

A. Decreased market share can lead to decreased revenues, but it is impossible to conclude this without knowing how large the market was before and after the price increase.

D. If the average customer purchased fewer ePods, and there is no increase in the total number of customers, this represents a loss of revenue.
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by vikram4689 » Sun Oct 14, 2012 11:06 pm
may be you can post the OE in spoiler or IM me. ok lets get back to question, now it seems that you are convinced with C and E. could you explain why you did not apply similar reasoning to C & E as you applied to A.

Moreover, i did not understand why mgmat thinks D will explain loss in profit Though mgmat (i am assuming that points you mentioned were also part of OE given by mgmat) raised questions about A but similar reasoning can be applied to D. Fewer people purchased the product but product itself costs more than before. So we cannot be sure whether company will gain or lose revenue.

what do you think about these points (my view on other options stated in my last post).
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by gmatdriller » Mon Oct 15, 2012 2:45 pm
Pls can we have an alternative explanations for the choices, and, in particular, if D is out why can't we also eliminate A?

Vikram, you got my point, but please go through the OE.


[spoiler](1) Identify the Question Type

We are asked about explanations for the decline in profits, so this question requires us to resolve a discrepancy. We will need to identify the apparent contradiction and consider what helps to explain why the information is not actually contradictory. Because the question uses the word EXCEPT, we need to find four options that appear to explain the decline in profits and select the remaining option.

(2) Deconstruct the Argument

We are given a company that sells only one product, which eliminates the need to complicate the argument with a varied product mix. Analysts thought raising prices would increase profits, but instead profits declined.

(3) State the Goal

We need to find four answer choices that could explain a decrease in profits and select the remaining option. Profit is calculated as revenue minus costs, so any direct increase in costs or decrease in revenue will tend to lower profits. We are looking to eliminate any options that increase costs, decrease revenue, or have no definite connection to either factor.

(4) Work from Wrong to Right

A. Decreased market share can lead to decreased revenues, but it is impossible to conclude this without knowing how large the market was before and after the price increase.

B. If sales were banned in several countries, there could be fewer customers, leading to a loss of revenue and lower profits.

C. If the cost of a component has increased, then costs in general have increased, which can lead to lower profits.

D. If the average customer purchased fewer ePods, and there is no increase in the total number of customers, this represents a loss of revenue.

E. Increased taxes represent increased costs[/spoiler]
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by vikram4689 » Mon Oct 15, 2012 9:05 pm
well i can explain you why we cannot say A will lead to reduction in revenue but for other options i would ask you to PM a mgmat expert or any other. in their explanation they have refrained from taking the effect of increased price of the product that can overturn some scenarios or that can nullify the negative effect on profits. i don't know why they did this and what is their reasoning behind this. For example, comsider this simple scenario that is in one of the options as well. If i am saying price of a pen increased from $10 to $15 and at the same time fewer people are buying the product. can you conclusively that profits will decline. no you can't say conclude this because we need to know reduced percentage of people who are buying the product to reach a conclusion.

In so far as explanation of A is concerned, consider this scenario. Product market was worth $100 billion and share of Newtronix was 10% i.e. $10 billion. Later share of Newtronix got reduced to 8% but markets increased to $200 billion. Now the new share of Newtronix is $16 billion. So, just because share decreased we cannot say revenue decreased we need to consider the market size as well.
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by anuprajan5 » Mon Oct 15, 2012 10:40 pm
Hi,

My take on this for option A is that if the price rise can compensate for the decrease in market share, then profits need not decline. They could remain constant or marginally better. Since this option lets doubt creep into the argument, I would choose this one.

As regards D, well this is just an instance of a cost rise. Therefore profits will decline because of increased costs.

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by gmatdriller » Tue Oct 16, 2012 12:04 am
@ Vikram,
let P and M represent price and market share before price increase; and
pm exists before increase

1.9P and 0.9M represent price and market share after price increase.
1.71PM >PM

Suppose after increase, we had 1.1P and 0.1M: Price increased only marginally, while share dropped drastically.
surely, 0.11PM < PM
On this basis, i see why A is wrong.

Hope this analysis makes sense?
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by \'manpreet singh » Tue Oct 16, 2012 1:29 am
gmatdriller wrote:Newtronix, a technology company that sells only one product, recently raised prices on its signature product, the ePod. Analysts had predicted that increased prices would translate into higher profits for Newtronics. However, Newtronix saw its profits decline after the price increase.

Each of the following, if true, is convincing as an explanation for the decline in Newtronix's profit EXCEPT

A; Newtronix's market share has declined since the price increase. (This explains that as soon as the price is increased market share decreases....so not the right choice)
B: A recent patent dispute led to the ban of sales of ePods in several countries.(this is also a possible reason for decrease..so wrong too)
C: Materials necessary to the production of a necessary component of the ePod recently went up in price.(This is not a possible explanation because it does not explain the decrease in profits)
D: The average customer purchased fewer ePods as a result of the price increase, while the number of customers purchasing ePods remained the same.(because fewer-er epods were bought hence it explains the profit decrease)
E: The government imposed higher taxes on Newtronix just prior to the price increase.(this could also be a possible reason for decrease in profits)


Hence i feel the answer is C.
Please let me know if the explanations are not clear .:)
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by anuprajan5 » Tue Oct 16, 2012 2:06 am
'manpreet singh wrote:
gmatdriller wrote:Newtronix, a technology company that sells only one product, recently raised prices on its signature product, the ePod. Analysts had predicted that increased prices would translate into higher profits for Newtronics. However, Newtronix saw its profits decline after the price increase.

Each of the following, if true, is convincing as an explanation for the decline in Newtronix's profit EXCEPT

A; Newtronix's market share has declined since the price increase. (This explains that as soon as the price is increased market share decreases....so not the right choice)
B: A recent patent dispute led to the ban of sales of ePods in several countries.(this is also a possible reason for decrease..so wrong too)
C: Materials necessary to the production of a necessary component of the ePod recently went up in price.(This is not a possible explanation because it does not explain the decrease in profits)
D: The average customer purchased fewer ePods as a result of the price increase, while the number of customers purchasing ePods remained the same.(because fewer-er epods were bought hence it explains the profit decrease)
E: The government imposed higher taxes on Newtronix just prior to the price increase.(this could also be a possible reason for decrease in profits)


Hence i feel the answer is C.
Please let me know if the explanations are not clear .:)
Manpreet,

There is 1 small issue with the logic for C.

Profit = Revenue - Cost.

If the material price goes up, costs go up, thereby reducing profit. So it is an explanation for the decline in profit.

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by \'manpreet singh » Tue Oct 16, 2012 9:31 pm
Anup,

Thanks for the feedback.

Your logic:

profit= Revenue- cost holds good, but i think you are forgetting that revenue is also increasing as the price is increasing too , so when cost is increasing so is the revenue ,though we don't know their proportion against each other....so considering this i feel the profit could be constant, less or even more.

But i really feel in this problem MANHATTAN has left some gaps in few other option which could be argued too. Though i still can't agree why they choose A as answer.
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