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    #1

    I need help for a question from a RC

    Hi, I have a problem with the following question from the below reading, from "The Official Guide for GMAT Review 2015". I will appreciate if you help me. Thank you so much.

    Reading:
    Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.


    The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.

    Question:
    38. The passage suggests that which of the following is true of a manufacturer’s fixed and sunk costs?
    (A) The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated.
    (B) If they are kept as low as possible, the manufacturer is very likely to realize significant profits.
    (C) They are the primary factor that determines whether a manufacturer will realize economies of scale.
    (D) They should be on a par with the fixed and sunk costs of the manufacturer’s competitors.
    (E) They are not affected by fluctuations in a manufacturing plant’s throughput.

    Answer:
    I checked B and the writer of the book says that E is correct. He say about these two options:
    B) The passage emphasizes that failing to keep throughput at an efficiently high level reduces profitability because that failure results in increased cost per unit (to which, of course, the plant’s fixed and sunk costs contribute). But the passage does not claim that keeping aggregate fixed and sunk costs very low is necessary in order to have the

    most competitive production operation.
    E) Correct. According to the passage, “throughput” refers to the flow of materials through a plant. This flow can vary as a result of various factors, but fixed and sunk costs—financial resources already committed—remain the same regardless of such variation.

    But these explanations are not convincing for me and I am urging that B is correct, because the red part of the reading discuss the correctness of B. Am I wrong?

  1. MikeNewYork's Avatar
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    #2

    Re: I need help for a question from a RC

    I think you have used this same title before. Please come up with more useful titles in the future. Some words from your actual question should be used. And what is an RC?

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    #3

    Re: I need help for a question from a RC

    Ok, I will do it in future. RC means reading comprehension.

  2. teechar's Avatar
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    #4

    Re: I need help for a question from a RC

    There's nothing in the passage that supports "B."

    Here's why "E" is the right answer.
    Quote Originally Posted by tesoke View Post
    A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks.

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