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by vertigo05 » Mon Oct 27, 2008 10:36 pm
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 Bidisha800 » Mon Oct 27, 2008 10:50 pm
Clear case of (A).
If Govt screws up, it has to carry the screwed up pricing for ever !
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by Jatinder » Mon Oct 27, 2008 11:33 pm
Bidisha800 wrote:Clear case of (A).
If Govt screws up, it has to carry the screwed up pricing for ever !
i think, we have to find the choice that is bad for military contractors.
i.e Choice A is bad for government but good for military contractors.

Have i misunderstood the stem ?
i came with C
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by rohangupta83 » Tue Oct 28, 2008 2:34 am
Jatinder wrote:
i think, we have to find the choice that is bad for military contractors.
i.e Choice A is bad for government but good for military contractors.
i came with C
I believe you are correct in understanding the question stem.

This question however makes us assume that the price of material is independednt of inflation.
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by vertigo05 » Tue Oct 28, 2008 4:36 am
hey bidisha800 u r right.
cud u please simplify this?

thanks.
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by jsl » Tue Oct 28, 2008 5:08 am
I eliminated to A & C and went for A because it addresses the actual baselining of the pricing method.

C attacks the "contractual price" which I don't think is addressed anywhere else.
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by mberkowitz » Tue Oct 28, 2008 1:52 pm
The practice of "historical pricing" eliminates the forces of supply and demand that dictate market prices of a good. As a result, if some fool in the government pays a ton for weapons, rather than paying the market price, this mistake will not be corrected by the market.

Therefore I believe A is the best answer.
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by Stuart@KaplanGMAT » Wed Oct 29, 2008 10:48 am
Jatinder wrote:
Bidisha800 wrote:Clear case of (A).
If Govt screws up, it has to carry the screwed up pricing for ever !
i think, we have to find the choice that is bad for military contractors.
i.e Choice A is bad for government but good for military contractors.

Have i misunderstood the stem ?
i came with C
The question reads:
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?
So, what we're supposed to criticize is "historical costing as an economically sound pricing method for military contracts". Nowhere does it suggest that we're biased toward the government OR the military.

(a) tells us that any inefficiencies in pricing will continue to be propagated. In other words, there's no correction inherent in the system. Accordingly, it's not "economically sound".
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by ssgmatter » Tue Jun 15, 2010 8:59 am
Stuart Kovinsky wrote:
Jatinder wrote:
Bidisha800 wrote:Clear case of (A).
If Govt screws up, it has to carry the screwed up pricing for ever !
i think, we have to find the choice that is bad for military contractors.
i.e Choice A is bad for government but good for military contractors.

Have i misunderstood the stem ?
i came with C
The question reads:
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?
So, what we're supposed to criticize is "historical costing as an economically sound pricing method for military contracts". Nowhere does it suggest that we're biased toward the government OR the military.

(a) tells us that any inefficiencies in pricing will continue to be propagated. In other words, there's no correction inherent in the system. Accordingly, it's not "economically sound".
Hi Stuart.

Please explain the reasons for eliminating the options B and C here
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by Stuart@KaplanGMAT » Tue Jun 15, 2010 9:16 am
vertigo05 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.
Hi!

As previously noted, our task is to show that historical costing is NOT an economically sound way to set prices.

(B) focuses on fluctuations in the inflation rate. Since historical costing adds a percentage "based on the current rate of inflation", it already accounts for the possibility of those fluctuations. So, (B) isn't a reason NOT to use the pricing method.

(C) focuses on the cost of materials. Since there's no economic reason why contractors shouldn't be compensated for the true cost of materials, (C) does not present a reason NOT to use historical costing.
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by ssgmatter » Tue Jun 15, 2010 9:38 am
Stuart Kovinsky wrote:
vertigo05 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.
Hi!

As previously noted, our task is to show that historical costing is NOT an economically sound way to set prices.

(B) focuses on fluctuations in the inflation rate. Since historical costing adds a percentage "based on the current rate of inflation", it already accounts for the possibility of those fluctuations. So, (B) isn't a reason NOT to use the pricing method.

(C) focuses on the cost of materials. Since there's no economic reason why contractors shouldn't be compensated for the true cost of materials, (C) does not present a reason NOT to use historical costing.
Thankyou Stuart for sharing your thoughts.

I got the logic behind B. Can you please explain C in a little more details.

Thanks in advance
Best-
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by Stuart@KaplanGMAT » Wed Jun 16, 2010 11:33 am
ssgmatter wrote:Thank you Stuart for sharing your thoughts.

I got the logic behind B. Can you please explain C in a little more details.

Thanks in advance
We're supposed to find a reason why historical costing is not an "economically sound pricing method". In other words, a reason why it would lead to a financially unrealistic price.

(c) tells us that the price will be heavily affected by material cost. Since there's nothing about this information that suggests that the contractors will gain an unfair financial benefit as a result, it doesn't provide a reason why historical costing is unfair.

If (c) had told us that contractors will artificially inflate their costs and that would affect the contract price, it would be relevant. However, as it stands, (c) just says that material costs will affect the contract price, something that's a usual part of business.
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