Post subject: GMAT Integrated Reasoning: Two-Part Analysis

Posted: Mon Sep 01, 2014 7:02 am

Joined: Tue Apr 13, 2010 8:48 am Posts: 483

A company sells sneakers. It plans to start production of a new model in three months. Meanwhile the current model it produces is not popular among buyers so the company had to reduce the price. It will lose $2 on every item produced in the next month. Then the loss will increase by $1 per item in each following month.

The overall contracted amount is 1,000,000 items for the next 3 months. The maximum capacity of the facility is 500,000 items monthly. The minimum monthly amount is 250,000 items. The penalty for producing less is $100,000 for 200,000 - 249,999 monthly items and $225,000 for 150,000 - 199,999 monthly items. The company can not produce less than 150,000 items monthly, this will terminate the contract.

The penalty for producing less than the contracted amount (or in case of termination) is $2.5 for every not-produced item of the contracted amount. Besides, if the company terminates the production of the current model, it will lose this production facility. Relocating to another facility with the same terms and conditions will cost $1,345,000.

Choose the worst and the best financial scenario among the given choices. Make only one choice in each column.

Scenarios: A. The company terminates the contract right away and moves to the new facility in three months. B. The company produces 500, 250, and 250 thousand items in each month respectively and stays in the current facility. C. The company produces 250, 250, and 250 thousand items in each month respectively and stays in the current facility. D. The company produces 500, 150, and 150 thousand items in each month respectively and stays in the current facility. E. The company produces 500 thousand items in the first month and terminates the current contract. It moves to the new facility when the new model is ready. ----------

Hi Team, I got this question wrong and would like the detailed explanation for option D. I chose that as Worst option and want to know how the calculations are done to get the amount lesser than in the option A. Thanks in advance.

Post subject: Re: GMAT Integrated Reasoning: Two-Part Analysis

Posted: Mon Sep 01, 2014 7:03 am

Joined: Fri Apr 09, 2010 2:11 pm Posts: 459

First of all, let us arrange the possible losses and penalties in categories. Then it will be easier to calculate them.

The time-period we are considering is 3 month.

1. (Penalty, one-time) If the company relocates to a new facility $1,345,000

2. (Penalty, monthly) If the company produces between 150,000 and 249,999 items in a month. $100,000 if between 150,000 – 199,999 $225,000 if between 200,000 – 249,999

3. (Penalty, one-time) If the company produces less than 1,000,000 items during these three months (contracted amount). $2.5 for each item.

4. (Losses, monthly) For every item the company produces in that month, it looses $2 – month 1 $3 – month 2 $4 – month 3

So these are the four categories of losses/penalties we are dealing with.

Quote:

Hi Team, I got this question wrong and would like the detailed explanation for option D. I chose that as Worst option and want to know how the calculations are done to get the amount lesser than in the option A. Thanks in advance.

"…the amount lesser…" If we consider losses with the "-" sign, then the lesser value we get, the greater the losses. Here we are not using the minus sign, so the greater the number, the greater losses it stands for. Just keep that in mind.

Calculations for A are very easy. We have only the two types of the penalties here: 1. (Penalty) $1,345,000 for relocating to a new facility. 3. (Penalty) $2.5 × 1,000,000 = $2,500,000 for not producing the whole contracted amount.

THE TOTAL LOSSES/PENALTIES in A: $1,345,000 + $2,500,000 = $3,845,000

In case of D, we have all types of penalties/losses, except the one for the relocation. 2. The company produces 150,000 in each of the two last months. The penalty for such low numbers is $225,000 in each month. $225,000 × 2 = $550,000

3. The company produces 500,000 + 150,000 + 150,000 = 800,000. That is 200,000 less than the contracted amount. The penalty is $2.5 for every item. $2.5 × 200,000 = $500,000

4. The losses for produced items are $2 × 500,000 = $1,000,000 in month 1 $3 × 150,000 = $450,000 in month 2 $4 × 150,000 = $600,000 in month 3 ----------------------- $1,000,000 + $450,000 + $600,000 = $2,050,000 in the three months.

THE TOTAL LOSSES/PENALTIES in D: $550,000 + $500,000 + $2,050,000 = $3,100,000

The total losses/penalties in A are greater than in D.

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