Gally Pumps starting a new business

gmatdriller wrote:Gally Pumps is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries. These contracts will include services such as re-balancing, repairing the bearings, replacing the pump impellers as they wear out etc. Since Gally is a newcommer, it aims to compete purely on price. Gally’s management is concerned that the revenues from these contracts will not be enough to cover their costs.

Which of the strategies below should Gally employ to ensure its business does not run into losses?

A: Target new refineries such as those built in the last 15 years with pumps that require fewer maintenance actions

B: Offer contracts to refineries that have an extremely active maintenance department

C: Offer premium services that others charge for, at a very low costs

D: Target refineries that are flush with money and can pay for repairs

E: Target refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs

I have a a question regarding the OA, but only after others have made contributions.

Regards.

OA is A Source: E-gmat

I had kept A as an answer until I read E. After reading E, I was contemplating between E and A and eventually chose E. The 'can reliably estimate' part forced me to choose E. Any thoughts?

Gally Pumps is aiming at starting a new business that offers annual contracts to repair and maintain pumps at refineries. These contracts will include services such as re-balancing, repairing the bearings, replacing the pump impellers as they wear out etc. Since Gally is a newcommer, it aims to compete purely on price. Gally’s management is concerned that the revenues from these contracts will not be enough to cover their costs.

Which of the strategies below should Gally employ to ensure its business does not run into losses?

A: Target new refineries such as those built in the last 15 years with pumps that require fewer maintenance actions

B: Offer contracts to refineries that have an extremely active maintenance department

C: Offer premium services that others charge for, at a very low costs

D: Target refineries that are flush with money and can pay for repairs

E: Target refineries where there is well documented repair records based on which Gally can reliably estimate the average annual repair costs

Even i was stuck btw A and E
Reason for eliminating E
Refineries with well documented repair records may also include companies that repair quite frequently . The estimate can be more than what Gally pumps can afford. Gally pumps cant afford frequent repairs if they want to cut losses.

If anybody else has an alternate explanation, pls explain

My take:

I am not sure whether the ability of Gally to estimate reliably or erroneously
the annual repair cost is core to achieving its goal.
Perhaps, only speculative for the books.

Because Gally sets out to compete purely on price(offering the best price),
it would be good if it has only few repairs to undertake.
Total cost = units x price per unit (already at the best price)
the only factor left is "units" as given by choice A

In that case, i think option A is the best choice.

Any other opinion is welcome.

Hello All, my take :

B) : If Gally offers contracts to refineries with extremely active maintenance departments then there is a good chance that Gally will not win those contracts. If these refineries already have an active maintenance department then they do not need a third party to do the same work.

C) : Well, Gally is still offering premium services at very low costs, so there is a very good chance that the business will run into losses.

D) : The refineries can pay but Gally will still charge low ( in order to win over the competition).

E) : Yes, Gally will get a reliable estimate of the average annual repair cost. Then what? If Gally charges more than the average cost and it might not get the contracts and if Gally charges less than the average then it might still suffer losses.

A) : If the maintenance in the refineries is low then the operational costs will be low and Gally ensure that it's business does not run into losses.

I did not choose E because it is mentioned that Gally can only get an idea of the the costs but there is no action taken by Gally in this option to actually ensure that there are no losses.