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Company X -- Revenue from Sale of Gas

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Company X -- Revenue from Sale of Gas

by ru2008 » Mon May 10, 2010 4:04 pm
Company X receives most of its revenues from the sale of gasoline through a network of gas stations that it owns across the country. The company purchases ready-for-sale gasoline from several oil refineries at wholesale prices and sells it to the final consumer at its gas stations. Over the next quarter, the management of Company X expects that the market price of gasoline will rise by approximately 10 percent. Therefore, the management projects that the next quarter's revenues from the sale of gasoline will also increase by approximately 10 percent.

The management's projection is based on which of the following assumptions?


Consumption of gasoline at the company's gas stations will not drop in response to higher prices.

Company profits will not decline below their current level.

Higher gasoline prices will not reduce the company's revenues from other business lines.

The costs of gasoline purchased by the company for subsequent sale at its gas stations will remain relatively constant.

The supply of gasoline is likely to decline over the next quarter.

-->Why is E wrong?
-->Reasoning for E: It is not necessary to assume that the supply of gasoline will decline, since the price increase can be driven by a variety of other factors, such as production costs, market environment, and others. -->Wouldnt production cost have an impact on the price? hence invalidating 'A'?
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by paddle_sweep » Mon May 10, 2010 9:28 pm
IMO it's A. Pls post OA.
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by fibbonnaci » Tue May 11, 2010 2:49 am
ru2008, i dont understand what you are asking. you ask why E is wrong and provide an explanation why E should not be assumed.

Well irrespective of your question I will try to answer this question. The first thing is CR is to identify the conclusion and the premises on which it rests on.

Conclusion: the management projects that the next quarter's revenues from the sale of gasoline will also increase by approximately 10 percent

Premise: the market price of gasoline will rise by approximately 10 percent.

If the market prices rise then there are lots of results that could occur. Let me present one scenario. The cost of gasoline rises, so the consumers stop using gasoline at the same rate as before and switch to other renewable sources maybe say cycling. Hence the revenue might drop or be the same. But the management projects that its revenues will increase. This can only happen if the current customers do not opt for other ways to cope up the high cost and stick to the current use of gasoline.

A) Consumption of gasoline at the company's gas stations will not drop in response to higher prices. [Bingo! it correctly points to our line of reasoning. This is the most logical assumption the author needs to make to validate his conclusion. My answer]

B) Company profits will not decline below their current level.[This is secondary. This does not link the premise and conclusion directly. we need another information about the expenditures. IF expenditures exceed the cost of increase in revenues then the profit can decline below the current level. too many assumptions involved. Eliminated!]

C) Higher gasoline prices will not reduce the company’s revenues from other business lines.[This does not relate to our conclusion at all. the conclusion deals with the increase in revenue due to increase in gasoline prices. Eliminated!]

D) The costs of gasoline purchased by the company for subsequent sale at its gas stations will remain relatively constant.[even if the cost is same, if the consumption decreases then obviously the conclusion will fall apart. Eliminated!]

E) The supply of gasoline is likely to decline over the next quarter. [you do not need to consider supply demand cycles here. Let the supply decline, but do consumers still use the gasoline at the same rate? if not then consumption decreases and the conclusion falls apart! Eliminated!]

Hope this helps!
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by ansumania » Tue May 11, 2010 5:57 am
fibbonnaci wrote:ru2008, i dont understand what you are asking. you ask why E is wrong and provide an explanation why E should not be assumed.

Well irrespective of your question I will try to answer this question. The first thing is CR is to identify the conclusion and the premises on which it rests on.

Conclusion: the management projects that the next quarter's revenues from the sale of gasoline will also increase by approximately 10 percent

Premise: the market price of gasoline will rise by approximately 10 percent.

If the market prices rise then there are lots of results that could occur. Let me present one scenario. The cost of gasoline rises, so the consumers stop using gasoline at the same rate as before and switch to other renewable sources maybe say cycling. Hence the revenue might drop or be the same. But the management projects that its revenues will increase. This can only happen if the current customers do not opt for other ways to cope up the high cost and stick to the current use of gasoline.

A) Consumption of gasoline at the company's gas stations will not drop in response to higher prices. [Bingo! it correctly points to our line of reasoning. This is the most logical assumption the author needs to make to validate his conclusion. My answer]

B) Company profits will not decline below their current level.[This is secondary. This does not link the premise and conclusion directly. we need another information about the expenditures. IF expenditures exceed the cost of increase in revenues then the profit can decline below the current level. too many assumptions involved. Eliminated!]

C) Higher gasoline prices will not reduce the company’s revenues from other business lines.[This does not relate to our conclusion at all. the conclusion deals with the increase in revenue due to increase in gasoline prices. Eliminated!]

D) The costs of gasoline purchased by the company for subsequent sale at its gas stations will remain relatively constant.[even if the cost is same, if the consumption decreases then obviously the conclusion will fall apart. Eliminated!]

E) The supply of gasoline is likely to decline over the next quarter. [you do not need to consider supply demand cycles here. Let the supply decline, but do consumers still use the gasoline at the same rate? if not then consumption decreases and the conclusion falls apart! Eliminated!]

Hope this helps!
hhi,

what if the price at which the company buys increases ? will not that affect the profit and not allow the profit to increase by 10 percent?

or this one doesn't hold good because here revenue is reffered .

pl. suggest.
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by fibbonnaci » Tue May 11, 2010 6:03 am
ansumania wrote:
fibbonnaci wrote:ru2008, i dont understand what you are asking. you ask why E is wrong and provide an explanation why E should not be assumed.

Well irrespective of your question I will try to answer this question. The first thing is CR is to identify the conclusion and the premises on which it rests on.

Conclusion: the management projects that the next quarter's revenues from the sale of gasoline will also increase by approximately 10 percent

Premise: the market price of gasoline will rise by approximately 10 percent.

If the market prices rise then there are lots of results that could occur. Let me present one scenario. The cost of gasoline rises, so the consumers stop using gasoline at the same rate as before and switch to other renewable sources maybe say cycling. Hence the revenue might drop or be the same. But the management projects that its revenues will increase. This can only happen if the current customers do not opt for other ways to cope up the high cost and stick to the current use of gasoline.

A) Consumption of gasoline at the company's gas stations will not drop in response to higher prices. [Bingo! it correctly points to our line of reasoning. This is the most logical assumption the author needs to make to validate his conclusion. My answer]

B) Company profits will not decline below their current level.[This is secondary. This does not link the premise and conclusion directly. we need another information about the expenditures. IF expenditures exceed the cost of increase in revenues then the profit can decline below the current level. too many assumptions involved. Eliminated!]

C) Higher gasoline prices will not reduce the company’s revenues from other business lines.[This does not relate to our conclusion at all. the conclusion deals with the increase in revenue due to increase in gasoline prices. Eliminated!]

D) The costs of gasoline purchased by the company for subsequent sale at its gas stations will remain relatively constant.[even if the cost is same, if the consumption decreases then obviously the conclusion will fall apart. Eliminated!]

E) The supply of gasoline is likely to decline over the next quarter. [you do not need to consider supply demand cycles here. Let the supply decline, but do consumers still use the gasoline at the same rate? if not then consumption decreases and the conclusion falls apart! Eliminated!]

Hope this helps!
hhi,

what if the price at which the company buys increases ? will not that affect the profit and not allow the profit to increase by 10 percent?

or this one doesn't hold good because here revenue is reffered .

pl. suggest.
yes sure, if the price of the gas at which the company buys increases then for sure the profits will change, but that is a second level of information. we do not have info about the change in price at which the company buys. so we cannot comment at this level. hence that information is beyond the scope and does not serve as an assumption linking the premise and conclusion.
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by ansumania » Tue May 11, 2010 6:09 am
ok...just trying to confirm......

option D could have been correct , had it not not been for 'revenue'....

in other words had the question mentioned 'profit' instead of 'revenue' , which one would you have picked and why?
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by fibbonnaci » Tue May 11, 2010 7:10 am
nope..you are not getting the first level of assumption. In CR every passage can involve layers of assumption but we need to find the assumption that links the premise to the conclusion.
Even if you say that the management made a statement that next year its profits will increase because of rise in gasoline prices- the first thing to assume is the consumption would remain the same. everything depends on the consumption. If we are given info about the expenditures as well as the revenue only then you can comment about the profits.
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by ansumania » Wed May 12, 2010 5:30 am
ru2008 wrote:Company X receives most of its revenues from the sale of gasoline through a network of gas stations that it owns across the country. The company purchases ready-for-sale gasoline from several oil refineries at wholesale prices and sells it to the final consumer at its gas stations. Over the next quarter, the management of Company X expects that the market price of gasoline will rise by approximately 10 percent. Therefore, the management projects that the next quarter's revenues from the sale of gasoline will also increase by approximately 10 percent.

The management's projection is based on which of the following assumptions?


Consumption of gasoline at the company's gas stations will not drop in response to higher prices.

Company profits will not decline below their current level.

Higher gasoline prices will not reduce the company's revenues from other business lines.

The costs of gasoline purchased by the company for subsequent sale at its gas stations will remain relatively constant.

The supply of gasoline is likely to decline over the next quarter.



-->Why is E wrong?
-->Reasoning for E: It is not necessary to assume that the supply of gasoline will decline, since the price increase can be driven by a variety of other factors, such as production costs, market environment, and others. -->Wouldnt production cost have an impact on the price? hence invalidating 'A'?

The supply of gasoline is likely to decline over the next quarter.

hey ru,

pl. send the 'source' detailsfor this question (author like veritas or whatever) so that stacey can answer.

She will provide a detaild explanation but only if she comes to know the source.
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by gmatmachoman » Wed May 12, 2010 6:00 am
@Fibo!!

That was a nice explanation "as-usual".

Welcome Back!!!
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by ansumania » Wed May 12, 2010 11:59 am
@ru2008

will you please give the source details?

looking forward to your response........

regards,

Ansumania
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by ru2008 » Thu May 13, 2010 6:54 am
I think this is MGMAT qsn..not sure how giving the source is any help
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by ansumania » Thu May 13, 2010 7:18 am
I guess these are some copyright related things...
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by Stacey Koprince » Fri May 14, 2010 8:40 am
Yes, sources need to be cited due to copyright issues. This material is all owned by someone - the author or the company. When citing something, we're obligated to give credit to whomever wrote the material.

And you're right! It is an MGMAT question. I looked it up in our database to make sure. :)

Q: assumption

Arg:
P1: most revenues of X from gas sales
P2: X buys gas from OR and sells to C
P3: next Q, price will rise 10% [note to self: what's rising 10%? The wholesale price? The retail price? Both? I think "market price" probably means retail price, but I'm not entirely sure.]
C: next Q projection: X revenues will increase 10%

Okay. This is what it seems like X is assuming will happen: "Market" price is going to increase 10%. Therefore X can raise its prices 10%. People will still buy the same amount of gas from X as they did... (last quarter? same quarter last year?). Well, whatever that figure is, if X sells the same amount of gas, but the price is 10% higher, then X will make 10% more money.

The correct answer will be something the author (in this case, really, the "management") MUST assume to be true in order to draw their conclusion.

A) Let's see, MUST it be true that the management thinks they'll sell at least the same volume of gasoline? Yep. If they raise prices 10% but sell less volume, then how can their revenues also rise 10%?

B) Profits? Argument doesn't mention profits. Argument is concerned only with revenues. Irrelevant.

C) Other business lines? Not important. The conclusion specifically says "revenues from the sale of gasoline" only. Irrelevant.

D) Costs? If they change, what would that change? The profits. Oh, but we're not interested in profits. We're only interested in revenues. Irrelevant.

E) Let's see, MUST it be true that the supply of gasoline from wholesalers will go down? Um. Not really. The supply could stay exactly the same, the prices could go up 10% for some other reason, company X could still sell the same volume as before / as expected, and then revenues could still go up 10%.

Re: the discussion going on above about profit vs. revenue. Read the argument carefully. It says NOTHING about profits; it ONLY talks about revenue. So, profit is outside of the scope of this question. Be really careful about those kinds of things!
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by ansumania » Fri May 14, 2010 9:47 am
stacey,

thanks a lot for the reply.

I have just one question. Had the question be about 'profit' and not 'revnue' (i,e replacing revenue by profit in the stimulus), would it have been option D over A? if not , will you pl. explain.
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by Stacey Koprince » Tue May 18, 2010 9:20 am
Had the question be about 'profit' and not 'revnue' (i,e replacing revenue by profit in the stimulus), would it have been option D over A? if not , will you pl. explain.
Let's see, so the last sentence in the argument would've said something like: "the management projects that the next quarter's profits will increase by ~10%." That's what you mean, yes?

So if the price goes up by 10%, the most direct connection is to revenues. If you assume that, as a result, revenues will go up 10% too, then you're assuming that none of the other variables affecting revenues will change. If you assume that, as a result, the profits will go up 10%, then you're ALSO assuming that none of the other variables that affect profits will change... and revenue is one of those variables! profit = revenue - cost, so revenue is still part of the picture here.

So... we'd have two right answers. D would address this new set-up, but A still would too.
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