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Historical Costing OG Verbal #4

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Historical Costing OG Verbal #4

by perfectstranger » Thu Jul 17, 2008 5:05 am
The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called "historical costing’’. historical costing allows contractors to protect their profits by adding a percentage increase based on the current rate of inflation, to the previous year's contractual price.
Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military
contracts?
(A) The government might continue to pay for
past inefficient use of funds.
(B) The rate of inflation has varied considerably
over the past twenty years.
(C) The contractual price will be greatly affected
by the cost of materials used for the products.
(D) Many taxpayers question the amount of
money the government spends on military
contracts.
E) The pricing method based on historical costing might not encourage the development of innovative weapons.
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by codesnooker » Thu Jul 17, 2008 5:12 am
IMO (A)
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by perfectstranger » Thu Jul 17, 2008 5:21 am
yes, but what is the explanation or assumption behind it?
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by perfectstranger » Thu Jul 17, 2008 10:48 am
does anyone have any idea?
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by NSNguyen » Fri Jul 18, 2008 7:51 am
A weaken the passage.
it states that the fund have been used wastely in the past, now still more waste.
Please share your idea and your reasoning :D
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by reachac » Fri Jul 18, 2008 11:51 pm
IMO A
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by tnaim » Tue May 04, 2010 1:45 pm
I seem not to be able to understand why option B is wrong. I would really appreciate any more explanation on option B:

B) B. The rate of inflation has varied considerably over the past twenty years.
my logic: inflation has varied --> government can't be certain of the final price it'll pay and will be under the mercy of fluctuations in inflation--> total cost can't be determined --> not economically sound
option A: is not related to historical pricing method, which as the question suggests seems to be mainly concerned with associating prices to changes in interest rates!
thank you in advance!
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by debmalya_dutta » Tue May 04, 2010 2:06 pm
(A) The government might continue to pay for
past inefficient use of funds. ( correct because historical accounting is based on the previous year's contractual price and the inflation. Inflation is market driven and hence fluctuates year over year - provides the contractors with a logical playing ground. let's look at the "contractual price " of the previous year. Say if in first year of purchase , the government used the funds inefficiently and hence paid more price for the goods. The price it pays for a certain set of goos gets fixed and the second year the prices are based on the first year's contractual price + inflation . But the contractual price was skewed because the government probably paid more for lesser goods or whatever be the reason for inefficiency
(B) The rate of inflation has varied considerably
over the past twenty years. (this will strengthen the use of historical costing)
(C) The contractual price will be greatly affected
by the cost of materials used for the products. (wrong because everytime the contractual price is based on the previous year's contractual price + current inflation)
(D) Many taxpayers question the amount of
money the government spends on military
contracts. (out of scope)
E) The pricing method based on historical costing might not encourage the development of innovative weapons. (out of scope)
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by ndesa » Sat Jun 18, 2011 7:32 am
Could somebody please tell me why we make the assumption that contract prices move in line with inflation? This is simply not true. Inflation is based on an increase to the price of ALL GOODS ACROSS THE ECONOMY, not specifically for the costs of materials used in weapons.

Construction costs erratically fluctuate ALL THE TIME. Inflation does not fluctuate in line with these costs.
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by GMATGuruNY » Sun Jun 19, 2011 2:52 am
perfectstranger wrote:The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called "historical costing��. historical costing allows contractors to protect their profits by adding a percentage increase based on the current rate of inflation, to the previous year's contractual price.
Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military
contracts?
(A) The government might continue to pay for
past inefficient use of funds.
(B) The rate of inflation has varied considerably
over the past twenty years.
(C) The contractual price will be greatly affected
by the cost of materials used for the products.
(D) Many taxpayers question the amount of
money the government spends on military
contracts.
E) The pricing method based on historical costing might not encourage the development of innovative weapons.
Learn to recognize the common flaws.
This argument exhibits a language shift.

The premise is about how the contractors protect their profits.
The conclusion is that the method used is economically sound.

The argument assumes that these two ideas are connected: that if contractors are able to protect their profits, then the method used is economically sound.

The correct answer will break the link between these two ideas: it will show that, even though the pricing method enables the contractors to protect their profits, it is NOT a method that is economically sound.

Answer choice A does just what we need: The government might continue to pay for past inefficient use of funds. Since historical costing guarantees that the contractors will make a profit, the contractors have no incentive to use government funds efficiently, resulting in a pricing method that enables the contractors to protect their profits but is NOT economically sound.

The correct answer is A.
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by mundasingh123 » Tue Jul 26, 2011 10:39 pm
GMATGuruNY wrote:
perfectstranger wrote:The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called "historical costing��. historical costing allows contractors to protect their profits by adding a percentage increase based on the current rate of inflation, to the previous year's contractual price.
Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military
contracts?
(A) The government might continue to pay for
past inefficient use of funds.
(B) The rate of inflation has varied considerably
over the past twenty years.
(C) The contractual price will be greatly affected
by the cost of materials used for the products.
(D) Many taxpayers question the amount of
money the government spends on military
contracts.
E) The pricing method based on historical costing might not encourage the development of innovative weapons.
Learn to recognize the common flaws.
This argument exhibits a language shift.

The premise is about how the contractors protect their profits.
The conclusion is that the method used is economically sound.

The argument assumes that these two ideas are connected: that if contractors are able to protect their profits, then the method used is economically sound.

The correct answer will break the link between these two ideas: it will show that, even though the pricing method enables the contractors to protect their profits, it is NOT a method that is economically sound.

Answer choice A does just what we need: The government might continue to pay for past inefficient use of funds. Since historical costing guarantees that the contractors will make a profit, the contractors have no incentive to use government funds efficiently, resulting in a pricing method that enables the contractors to protect their profits but is NOT economically sound.

The correct answer is A.
Hi GmatGuruNY, Does the economical soundness of the plan have to be considered from the point of view of the Contractors or the Government ?
I Seek Explanations Not Answers
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by winniethepooh » Tue Jul 26, 2011 11:58 pm
Government's side, of course
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by tanviet » Thu Jul 28, 2011 7:28 pm
GMATGuruNY wrote:
perfectstranger wrote:The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called "historical costing��. historical costing allows contractors to protect their profits by adding a percentage increase based on the current rate of inflation, to the previous year's contractual price.
Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military
contracts?
(A) The government might continue to pay for
past inefficient use of funds.
(B) The rate of inflation has varied considerably
over the past twenty years.
(C) The contractual price will be greatly affected
by the cost of materials used for the products.
(D) Many taxpayers question the amount of
money the government spends on military
contracts.
E) The pricing method based on historical costing might not encourage the development of innovative weapons.
Learn to recognize the common flaws.
This argument exhibits a language shift.

The premise is about how the contractors protect their profits.
The conclusion is that the method used is economically sound.

The argument assumes that these two ideas are connected: that if contractors are able to protect their profits, then the method used is economically sound.

The correct answer will break the link between these two ideas: it will show that, even though the pricing method enables the contractors to protect their profits, it is NOT a method that is economically sound.

Answer choice A does just what we need: The government might continue to pay for past inefficient use of funds. Since historical costing guarantees that the contractors will make a profit, the contractors have no incentive to use government funds efficiently, resulting in a pricing method that enables the contractors to protect their profits but is NOT economically sound.

The correct answer is A.
thank you GMATGuruNY, we appreciate the expert comment very much.
Realizing the SHIFT is a method which is applied when the assumption is SUPPORTER ASSUMPTION. When the assumption is defender assumption this method is useless. DEFENDER /SUPPORTER ASSUMPTION is explain in GMAT CRITICAL REASONING BIBLE book. Among assumption based questions, haft is bases on supporter assumption and haft is based on defender assumption. So your method-kaplan method is effective for only haft of assumption based questions.

is my thinking correct.
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by tanviet » Thu Jul 28, 2011 7:34 pm
Dear Mitch Hunt

What I want to know is that do you have any method to attack the questions which is based on defender assumption.

the comment of experts help us a lot for gmat.
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by tanviet » Thu Jul 28, 2011 8:35 pm
I wish experts, member do discuss the SHIFT METHOD which is not applied for the following defender assumption based question.

the following is based on defender assumption, which is from page 178 of the book CRITICAL REASONING BIBLE FOR GMAT.

In Western economy, more energy is used to operate buildings than to operate transportation. Much of the decline in energy consumption since the oil crises of 1970 is due to more efficient use of energy in homes and offices. New building technologies, which make lighting, heating, and ventilation systems more efficient, have cut billions of dollars from energy bills in the West. Since energy savings from these efficiencies save several billion dollars per year today, we can conclude that 50 to 100 years from now they will save more than $200 billion per year (calculated in current dollars)

a, technology used to make buildings energy efficient will not become prohibitively expensive over the next century

b, Another oil crisis will occur in the next 50 to 100 years

c, buildings will gradually become a less important consumer of energy than transportation

d, Energy bills in the West will be $200 billion lower in the next 50 to 100 years

e, Energy efficient technologies based on new scientific principles will be introduce in the next 50 to 100 years.

WE CAN NOT APPLY SHIFT METHOD HERE. how to attack this kind of question ?. SHIFT METHOD is very effective when there is new thing in conclusion but not in evidence.

members, please, find out the OA, and more important, the method for taking this kind of questions. Haft of the weakening/strengthening questions are based on defender assumption and are useless for SHIFT METHOD.

Remember the statement in the Kaplan book, " identifying the assumption is key to answering most CR questions." So, it is important to attack this kind of assumption questions.
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