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.