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Profits of a magazine company

Expert replies
by pareekbharat86 » Sat Nov 02, 2013 5:24 am
Because postage rates are rising, Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year. The quality of articles, the number of articles published per year, and the subscription price will not change. Market research shows that neither subscribers nor advertisers will be lost if the magazine's plan is instituted.

Which of the following, if true, provides the strongest evidence that the magazine's profits are likely to decline if the plan is instituted?

(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.
(B) The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles.
(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.
(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past.
(E) Production costs for the magazine are expected to remain stable.

OA is D.

Source- GMAT Practice Test Code 25
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Bharat.
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Source: — Critical Reasoning |

by theCodeToGMAT » Sat Nov 02, 2013 10:03 am
Since the number of publications will decline, the profit of Home Decorator Magazine will be impacted if the advertisers continues to pay the same per issue. Only option {D} caters this situation

{A} - INCORRECT; this may result in increased profits
{B} - INCORRECT; doesn't impact the profits..
{C} - INCORRECT; we are not aware about the statistics of "long-time subscribers"
{D} - CORRECT;
{E} - INCORRECT; means that Magazine company will not pay more for production; doesn't show loss
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by pareekbharat86 » Sun Nov 03, 2013 2:37 am
theCodeToGMAT wrote:Since the number of publications will decline, the profit of Home Decorator Magazine will be impacted if the advertisers continues to pay the same per issue. Only option {D} caters this situation

{A} - INCORRECT; this may result in increased profits
{B} - INCORRECT; doesn't impact the profits..
{C} - INCORRECT; we are not aware about the statistics of "long-time subscribers"
{D} - CORRECT;
{E} - INCORRECT; means that Magazine company will not pay more for production; doesn't show loss
Hi Rahul,

Thanks for your response. What I fail to understand with option D is that it is true only if we assume that advertisement revenue covers the fixed costs of the company. If adv. revenue covers only the variable costs, then D becomes irrelevant for the company's decision making.

Happy Diwali!
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by theCodeToGMAT » Sun Nov 03, 2013 6:29 am
Happy Diwali to you toooo!!! :)

Regarding the question:
Do not assume too much :) the question premise is very direct.

Lets try to analyze the problem Mathematically:

Suppose, before the plan, an edition costs 40$, of which advertisers pay off 20$, + 2$(new postage charges) and company charges 50$.. so the Profit is "20+8"$.. and say 1000 copies are sold in total in a year .. SO, total profit = "28*1000" annually

Now, after the plan, if 800 copies are sold.. and advertisers still pay off 20$ then the profit will drop to "28*800"
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by Brent@GMATPrepNow » Sun Nov 03, 2013 7:26 am
pareekbharat86 wrote:Because postage rates are rising, Home Decorator magazine plans to maximize its profits by reducing by one half the number of issues it publishes each year. The quality of articles, the number of articles published per year, and the subscription price will not change. Market research shows that neither subscribers nor advertisers will be lost if the magazine's plan is instituted.

Which of the following, if true, provides the strongest evidence that the magazine's profits are likely to decline if the plan is instituted?

(A) With the new postage rates, a typical issue under the proposed plan would cost about one-third more to mail than a typical current issue would.
(B) The majority of the magazine's subscribers are less concerned about a possible reduction in the quantity of the magazine's articles than about a possible loss of the current high quality of its articles.
(C) Many of the magazine's long-time subscribers would continue their subscriptions even if the subscription price were increased.
(D) Most of the advertisers that purchase advertising space in the magazine will continue to spend the same amount on advertising per issue as they have in the past.
(E) Production costs for the magazine are expected to remain stable.

OA is D.

Whenever you see the word "profit" on the GMAT, you should think of revenue and expenses.
Publishing only half the number of issues will reduce annual expenses, but it will also reduce annual revenue. To make up for lost revenue, the magazine must raise its subscription price (which it does not intend to do), increase the number subscribers (which, according to the research, will not happen), increase the number of advertisers (which, according to the research, will not happen), or increase its advertising revenue (which could happen) .

Answer choice D suggest that there probably won't be an increase in advertising revenue.

Cheers,
Brent
Brent Hanneson - Creator of GMATPrepNow.com
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