Profit Margin or, Price increase for each goods?

Expert replies

newgmattest: Senior | Next Rank: 100 Posts; Posts: 52; Joined: Wed May 18, 2011 8:48 pm; Thanked: 4 times

by newgmattest » Thu Jun 02, 2011 5:36 pm

Companies in a certain metropolitan city are required to pay a tax of 3% on all corporate profits. Between last year and this year, the amount of this tax paid by retail merchant Company X doubled, even though its total sales fell dramatically.

If the information above is accurate, which of the following conclusions can be properly drawn?

(a) Company X has significantly raised the prices it charges for goods.
(b) The profit margins at Company X have increased this year.
(c) Not relevant option.
(d) Not relevant option.
(e) Not relevant option.

Now the question is why answer (a) is not correct and why (b) is correct. I am not able to digest the answer:)

Experts please provide your opinion.

Last edited by newgmattest on Thu Jun 02, 2011 6:57 pm, edited 1 time in total.

Source: Beat The GMAT — Critical Reasoning | Thu Jun 02, 2011 5:36 pm

coolly01: Junior | Next Rank: 30 Posts; Posts: 29; Joined: Sun Feb 20, 2011 11:03 pm

by coolly01 » Thu Jun 02, 2011 6:18 pm

newgmattest wrote:Companies in a certain metropolitan city are required to pay a tax of 3% on all corporate profits. Between last year and this year, the amount of this tax paid by retail merchant Company X doubled, even though its total sales fell dramatically.

If the information above is accurate, which of the following conclusions can be properly drawn?

(a) Company X has significantly raised the prices it charges for goods.
(b) The profit margins at Company Y have increased this year.
(c) Not relevant option.
(d) Not relevant option.
(e) Not relevant option.

Now the question is why answer (a) is not correct and why (b) is correct. I am not able to digest the answer:)

Experts please provide your opinion.

Hi, I'm not expert, but I still want to give out my approach
If sales (the amount of product) drop, the price must increase to have the profit increase.
Besides, with (b) Y has nothing to do with the argument, it's irrelavent
Thanks

newgmattest: Senior | Next Rank: 100 Posts; Posts: 52; Joined: Wed May 18, 2011 8:48 pm; Thanked: 4 times

by newgmattest » Thu Jun 02, 2011 6:56 pm

Sorry typo. Corrected now....

coolly01: Junior | Next Rank: 30 Posts; Posts: 29; Joined: Sun Feb 20, 2011 11:03 pm

by coolly01 » Thu Jun 02, 2011 7:18 pm

newgmattest wrote:Companies in a certain metropolitan city are required to pay a tax of 3% on all corporate profits. Between last year and this year, the amount of this tax paid by retail merchant Company X doubled, even though its total sales fell dramatically.

If the information above is accurate, which of the following conclusions can be properly drawn?

(a) Company X has significantly raised the prices it charges for goods.
(b) The profit margins at Company X have increased this year.
(c) Not relevant option.
(d) Not relevant option.
(e) Not relevant option.

Now the question is why answer (a) is not correct and why (b) is correct. I am not able to digest the answer:)

Experts please provide your opinion.

Hmmm, then (b)is better, because it focuses on the profit which is the key here.
In (a), the price increases, and we can think of many factor affecting the profit margin such as cost. Besides, the span of time here in not clear enough.
So (b) is the best option
Hope this helps
Thanks

vikram4689: Legendary Member; Posts: 1325; Joined: Sun Nov 01, 2009 6:24 amFollowed by: 14 members; Thanked: 105 times

by vikram4689 » Thu Jun 02, 2011 9:32 pm

Thats tricky ....even i went with A as timer was clocked over 2 minutes

But then i

thought over it....
more tax is paid that means earnings/profits are more ( which is directly stated in B ). Now problem with A is that we tend to relate the increases prices to increase profits but earnings may increase/remain same/decrease as prices may be increases because of increase of prices raw material. Hence A is wrong....Nice Question though

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itsmebharat: Master | Next Rank: 500 Posts; Posts: 150; Joined: Tue Aug 18, 2009 7:36 amFollowed by: 2 members; Location: gurgaon; Thanked: 8 times

by itsmebharat » Thu Jun 02, 2011 11:58 pm

IMO B

I am not an Expert, please feel free to suggest if there is an error.

cans: Legendary Member; Posts: 1309; Joined: Mon Apr 04, 2011 5:34 amFollowed by: 123 members; Location: India; Thanked: 310 times; GMAT Score:750

by cans » Fri Jun 03, 2011 12:01 am

newgmattest wrote:Companies in a certain metropolitan city are required to pay a tax of 3% on all corporate profits. Between last year and this year, the amount of this tax paid by retail merchant Company X doubled, even though its total sales fell dramatically.

If the information above is accurate, which of the following conclusions can be properly drawn?

(a) Company X has significantly raised the prices it charges for goods.
(b) The profit margins at Company X have increased this year.

Now the question is why answer (a) is not correct and why (b) is correct. I am not able to digest the answer:)

Experts please provide your opinion.

Tax is to be paid on profits. We know that tax paid increased and thus it means profit also increased.
a) prices have increased. But maybe then costs also increased in which case profits won't increase and thus rejected.

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