Because postage rates are rising, Home Decorator magazine

[rahul.gmat]

One of the strategies in the study guide is to use real nos when statistics are given. That works perfectly here. Say 100 magazines were sold @ $10 each and postage was $3. Profit (including cost of producing also) is 100*10 - 100*3 = $700. Increase of a third in postage means it is now $4 and no of copies is halved, therefore profit is 50*10 - 50*4 = $300. This makes (A) a very strong answer. (D) says advertising cost/issue will be the same, that dosent change anything, that only means an obviously lesser proportional profit. Cost of printing, postage also reduce proportionally, so do the advertising revenues so its obvious that there will be proportional decrease in total profit but keeping the profit % same. With (A) profit decreases drastically and not proportionally. In fact (A) makes the conclusion that profits will be maximized coz it eliminates the possibility that advertisers are not drastically reducing rates due to lesser subscription. Can you please elaborate?

[esledge]

Hi Rahul, in order for us to answer as many questions as possible, we are asking folks to post the entire question and answer choices so we don't have to look it up and other users can study from the same material. Thanks in advance.

[rahul.gmat]

Hi Emily, I appreciate the need to post the entire question from the OGs, but the thing is that I have doubts in several OG ques esp SCs, and most of the doubts are in the explanations. Putting up the entire questions and explanations would be really cumbersome as I am struggling for time before my deadline. I would really appreciate if you could answer the ques by the no# itself. Hope you can cater to this request.

[dbernst]

Rahul,

With unlimited time we would love to cater to this request. However, a major component of the forums is for us to permit numerous students to learn from our explanations. Many of these students may not have access to identical GMAT preparation materials, and thus will only benefit through the ability to read entire questions along with our acccompanying discussions of the issues. Furthermore, we eventually intend to build a database of questions that we have already addressed so we, as instructors, do not find ourselves responding to the same problems multiple times. Once this database is developed, forum users will have the opportunity to simply access questions such as OG Critical Reasoning #71 and an expert MGMAT explanation will be instantly at their disposal.

I hope you understand our concerns, as we definitely sympathize with your time constraints. Please feel free to continue to ask questions, and we will continue to do our best to help you achieve your GMAT, and MBA, goals.

-Dan (and the MGMAT team)

[rahul.gmat]

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.

[esledge]

Hi Rahul,

I think you missed a premise in the argument that caused you to make a math error. We are told that the number of issues will be reduced by half, but the number of subscribers and the subscription price will not change.

Your calculation seems to be cutting the revenue in half along with the number of issues; in fact, revenue should stay the same (until you consider choice D, the only one that indicates revenue could decrease as a result of the plan.)

Let's address your concern about choice A by fixing the math.

Let's say the current situation is:
Number of subscribers = 100 people
Annual subscription price = $20
Number of issues annually: 6
Postage cost per issue = $1
Production cost per issue = $2
Current profit = 100 [($20) - (6 issues)($1/issue) - (6 issues)($2/issue)] = (100)($20-$6-$12) = $200

That means the situation under the new plan and considering choice A:
Number of subscribers = 100 people
Annual subscription price = $20
Number of issues annually: 3 (half of 6)
Postage cost per issue = $1.33 (1/3 increase)
Production cost per issue = $2
Resulting profit = 100 [($20) - (3 issues)($1.33/issue) - (3 issues)($2/issue)] = (100)($20-$4-$6) = $1000 (big increase)

No matter what numbers we chose, all non-postage costs will decrease by half, while the postage costs will decrease by half (half as many issues) then increase by 1/3 of the result (postage increase) for a final postage cost that is 2/3 of the current postage cost.

One of the strategies in the study guide is to use real nos when statistics are given. That works perfectly here. Say 100 magazines were sold @ $10 each and postage was $3. Profit (including cost of producing also) is 100*10 - 100*3 = $700. Increase of a third in postage means it is now $4 and no of copies is halved, therefore profit is 50*10 - 50*4 = $300. This makes (A) a very strong answer. (D) says advertising cost/issue will be the same, that dosent change anything, that only means an obviously lesser proportional profit. Cost of printing, postage also reduce proportionally, so do the advertising revenues so its obvious that there will be proportional decrease in total profit but keeping the profit % same. With (A) profit decreases drastically and not proportionally. In fact (A) makes the conclusion that profits will be maximized coz it eliminates the possibility that advertisers are not drastically reducing rates due to lesser subscription. Can you please elaborate?

[rahul.gmat]

Thanx Emily, its clear now. Actually I was thinking no of copies of the magazine not ISSUES. Now it all makes sense. Thank you.

[OutOfTime]

Great explanation Emily.
The correct answer was not very evident in a quick glance.
For people who just read the question and want the answer, the correct answer is D.