Two years ago, the cost of the raw material used in a partic

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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.

What's the best approach to determine the answer? Can any experts help?

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by elias.latour.apex » Tue Jan 02, 2018 5:27 pm
This is an extremely controversial question drawn from the Manhattan GMAT CAT tests. Supposedly (A) is the best answer.

The reasoning expressed by MGMAT instructors is that (A) offers an alternate explanation for the decrease in profit margins. Supposedly, increased competition is what is really causing the reduction in profit margins. Since that is the real reason, attempting to find cheaper source of the raw material will be ineffective.

However, I find this argument unconvincing. We know that profit margins are decreasing, and answer choice (A) tells us that revenues are also decreasing. A viable strategy to deal with this is to cut costs faster than revenues decrease. Thus, the head of engineering's decision seems sound, and (A) does not effectively refute the decision. If we assume that the trend of the past two years will continue and revenues will be continue to be forced down, we might be able to argue that his plan will not work, but this does cast doubt on the validity of the decision, the task we are assigned in the question stem. Additionally, why should we assume that what has happened during the past two years must necessarily continue to happen this year? For all we know competition will stay the same or some firms may even go out of business, reducing competition and permitting revenue to recover.

As far as I am concerned, there is no correct answer.
Elias Latour
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