MGMAT CAT 3 - CR: Gas Prices

[priyankur.saha]

CAT 3 Q-25
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?

A Consumption of gasoline at the company’s gas stations will not drop in response to higher prices.
B Company profits will not decline below their current level.
C Higher gasoline prices will not reduce the company’s revenues from other business lines.
D The costs of gasoline purchased by the company for subsequent sale at its gas stations will remain relatively constant.
E The supply of gasoline is likely to decline over the next quarter.

- I eliminated to A and D but selected D finally.
D says cost of gasoline would not change. In order to get approximately 10% "revenue increase", cost of purchase should not increase or decrease. Otherwise profit could be more or less than 10%. Hence negation do confirm the validity of answer.
A also confirms the point that consumption should not be less. Because if consumption is less revenue would be less than 10% and if consumption is more revenue would be more than 10%.

I think A and D both satify the validity of assumption. OE says that "cost" is beyond the scope. I do not think so. When the argument is mainly talking about purchase - revenue - sale, we just can not ignore "cost" factor. Please provide your comments.

[botirvoy]

I agree with OE that "cost" is outside scope; 10% revenue increase is a function of only sales price and volume.
So, I chose A on this.

[landt2837]

CAT 3 Q-25
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?

A Consumption of gasoline at the company’s gas stations will not drop in response to higher prices.
B Company profits will not decline below their current level.
C Higher gasoline prices will not reduce the company’s revenues from other business lines.
D The costs of gasoline purchased by the company for subsequent sale at its gas stations will remain relatively constant.
E The supply of gasoline is likely to decline over the next quarter.

- I eliminated to A and D but selected D finally.
D says cost of gasoline would not change. In order to get approximately 10% "revenue increase", cost of purchase should not increase or decrease. Otherwise profit could be more or less than 10%. Hence negation do confirm the validity of answer.
A also confirms the point that consumption should not be less. Because if consumption is less revenue would be less than 10% and if consumption is more revenue would be more than 10%.

I think A and D both satify the validity of assumption. OE says that "cost" is beyond the scope. I do not think so. When the argument is mainly talking about purchase - revenue - sale, we just can not ignore "cost" factor. Please provide your comments.

Revenue= Quantity * Price (R=Q*P) They don't say about Profit (Prof=Revenue - Cost)

[priyankur.saha]

Oops......now I see the gap....thanx a ton landt2837.

Rev = Q*P [:) missed it]

[JonathanSchneider]

Yeah, be careful. When we are told that the market price will rise, we are talking about money. But to go from there to profit is a switch. The revenue will be equal to this new market price times the amount sold. Be careful with the word "revenue." We're not talking about profit here. Just intake dollars. (If we were talking about profit, we'd need to discuss cost as well, it would seem.)