DS from MGMAT

[raja_asu]

The total cost of producing item X is equal to the sum of item X's fixed cost and variable cost. If the variable cost of producing X decreased by 5% in January, by what percent did the total cost of producing item X change in January?

(1) The fixed cost of producing item X increased by 13% in January.

(2) Before the changes in January, the fixed cost of producing item X was 5 times the variable cost of producing item X.

The answer is C. but I chose B.

MGMAT explanation for not choosing B is (2) doesn't have any information about the percentage change of fixed cost.
My question is why do we even expect fixed cost to change? Why don't we just assume its fixed(..as the name implies), nowhere in the question gives any kind of hint about the change in the fixed cost. Can u explain it clearly, please?

Thanks,

Rajesh

[StaceyKoprince]

This requires an understanding of the business terms fixed cost and variable cost.

A fixed cost is one that does not vary depending upon the production numbers of whatever you're making. For example, a company would pay a fixed cost for rent, regardless of how many products it makes on a daily basis. The fixed cost can change - for example, the rent can go up - but the change is not dependent on the amount of product made.

A variable cost is one that does vary depending upon the production numbers. For example, if I'm making tables, I need a different amount of wood to make 10 tables than to make 100 tables - here, the costs are directly tied to the number of units I produce.

Do make sure you're familiar with basic business terms for the test, such as the above, profit, operating costs, etc. - you may not see these, but you may.

[prerak]

Stacey, I understand your reasoning and explanation about the differences between fixed and variable cost, but don't see how we can be expected to know that the fixed cost may change. There is nothing that suggests that it will change. Based on Answer choice B, you have the relationship between the values of fixed and variable costs that you need.

[RonPurewal]

Stacey, I understand your reasoning and explanation about the differences between fixed and variable cost, but don't see how we can be expected to know that the fixed cost may change. There is nothing that suggests that it will change. Based on Answer choice B, you have the relationship between the values of fixed and variable costs that you need.

while it of course won't hurt to be familiar with concepts like fixed cost, variable cost, etc., the only business concept that you absolutely MUST know for the test is:
profit = revenue - cost
everything else either won't be tested or will be explained in full in the problem statement. (in this problem, the statement tells you everything you need to know about fixed and variable cost. concentrating excessively on their real-world significance will in fact hinder your progress on the problem.**)

in this case, you need to know the percentage change in the TOTAL of two items. this demands that you be able to calculate the ratio of (current TOTAL cost) : (previous TOTAL cost).

(1) you can't calculate the ratio, because you don't know how big FC is in relation to VC. (if FC >>> VC, then the % change will be close to +13%, while if FC <<< VC, then the % change will be close to -5%)

(2) you can't calculate the ratio, because you have no idea what has happened to FC. unless the problem ties FC to VC, you should assume that the two quantities can vary independently (in the same way as you'd assume that the length and width of a rectangle are independent, unless you're told otherwise).

(together) let previous VC be 'v' and previous FC be '5v'. then the previous TOTAL cost is 6v.
make the % changes --> new VC is 0.95v, and new FC is 1.13(5v) = 5.65v. therefore, new TOTAL cost is 6.6v.
you can figure the % change from 6v to 6.6v, regardless of the value of v,*** so this is sufficient.

--

**i find that this problem actually becomes easier if you replace 'total cost' with 'total body weight', 'fixed cost' with 'lean mass', and 'variable cost' with 'body mass'. try it; you'll like it.
***the % change is +10%, but you'd be wasting your time by figuring that out: it's data sufficiency, so you're done as soon as you figure out that there IS a unique solution (whether you bother to find it or not).

[RonPurewal]

Stacey, I understand your reasoning and explanation about the differences between fixed and variable cost, but don't see how we can be expected to know that the fixed cost may change. There is nothing that suggests that it will change.

dude!

this is completely the wrong attitude to have about unknown quantities.

unknowns are called UNKNOWNS for a very, very good reason: you don't know ANYTHING about them that can't be formally deduced. therefore, the correct attitude is 'There is nothing that suggests that it can't change' !

i suspect that the real problem here is the spurious appearance of the term 'fixed cost': you're assuming that the fixed cost is, well, fixed (as in 'can't change from month to month'). unfortunately, that's not true, and i think this is what stacey means when she tells you that you should understand the business meaning of the term: such understanding would help you realize that the fixed cost CAN change.

[sanjaylakhani]

Hi

I do not agree that we are to assume that FIXED COSTS WILL CHANGE- it is clearly provided that only variable costs has changed.

This question clearly needs review....

BTW, i am familiar with all the concepts of costing...

[JonathanSchneider]

Actually, I'd go with Stacey on this one. Moreover, note that were (2) sufficient, it would conflict with (1) by providing a different scenario - this cannot happen.