MGMAT - CR

by **Supernova** Fri Mar 14, 2008 7:21 am

Profits for one of Company X's flagship products have been declining slowly for several years. The CFO investigated and determined that inflation has raised the cost of producing the product but consumers who were surveyed reported that they weren't willing to pay more than the current price. As a result, the CFO recommended that the company stop producing this product because the CEO only wants products whose profit margins are increasing.

The answer to which of the following questions would be most useful in evaluating whether the CFO's decision to divest the company of its flagship product is warranted?

A. Does the company have new and profitable products available with which to replace the flagship product?
B. Will the rest of Company X's management team agree with the CFO's recommendation?
C. Are there additional features which could be added to the product and for which consumers might be willing to pay a higher price?
D.Is there a way to alter the manufacturing or distribution processes in order to reduce the cost to produce the flagship product?
E. What percentage of Company X's revenues is represented by sales of the flagship product in question?

by **Supernova** Fri Mar 14, 2008 7:26 am

OA - D

I didn't pick D b'coz "flagship" product means signficant amount of company's revenue comes from that specific product so D eliminated. Picked E in compulsion as no other choices were inside the scope of argument.

Please explain!

by **Dhruv** Sun Mar 16, 2008 1:38 am

The ceo is not really concerned whether the product is contributing significantly to the comapnys sales. his only concern from the question seems to be the declining margins. only option tackling that part is D

by **StaceyKoprince** Mon Mar 17, 2008 5:21 pm

Supernova - I'm not sure I understand your explanation for why you eliminated D. D talks about reducing the amount it costs the company to produce the product - it says nothing about how much they'll charge for it or how much it will bring in (or already brings in) in revenues - it doesn't address revenues at all. Or perhaps you meant you wanted the choice to address revenues and it doesn't? I'm not sure exactly what you're saying here...

Also, FYI, flagship doesn't necessarily mean it brings in a significant portion of the company's revenues. It just means it's a significant product for that company for SOME reason - a flagship product could actually be something given away for free as a marketing thing and which drives revenues to other products without generating any revenues itself!

by **Guest** Fri Oct 17, 2008 9:50 pm

Although I also would answer D in the question, C seems to be very tempting. Could you explain why C does not fit in this question? Because increasing the price could also be a good way to increase the profit margin..

Thanks..

by **esledge** Mon Nov 10, 2008 7:15 pm

I agree (C) is tempting. It's important to know how to chose between two appealing answers, especially those that seem to be saying the same thing different ways.

The argument indicates that:
--profits have been declining slowly for several years
--inflation has raised the cost of producing the product
--consumers aren't willing to pay more than the current price

The text I have underlined in the question is significant, too: The answer to which of the following questions would be most useful in evaluating whether the CFO's decision to divest the company of its flagship product is warranted?

If Profit = Revenue - Cost,

The increased revenue sought by (C) would support profitability. However, (C) and the premises make it clear that "additional features" would have to be added to the product to convince consumers to pay more. This raises the question of whether those features would create additional costs, a question not addressed by (C).

The reduced cost sought by (D) would also support profitability. Note that the goal of this question is to determine whether the cost could be reduced to the previous levels, which is more feasibile than changing the product in the hopes of getting higher revenues. Significantly, choice (D) doesn't raise any other (unintended) questions. The answer to (D) alone would be helpful in evaluating the CFO's decision.