guerrero25 wrote:
The total amount of profits of Brandeburgh Bicycle Company (BBC) must have increased dramatically over the last 5 years. After BBC developed a light and strong new material for its bicycles, total sales increased to twice what they were 5 years ago. Nevertheless, sales of certain types of bicycles, for which the new material is not used due to its high cost, have remained constant or, as is the case with bicycles for children, have decreased. Four years ago, sales of children’s bicycles constituted 30 percent of the total bicycle sales of BBC, and now they constitute barely 20 percent of all BBC’s sales.
Which of the following must be assumed in order for the assertion that the total amount of profits of BBC has increased dramatically over the last several years to be true?
(A)Increased sales always result in increased profits.
(B)BBC bicycles are not significantly more expensive than 5 years ago.
(C)Over the last 5 years, total sales of BBC racing bicycles did not decrease by more than 70 percent.
(D)Over the last 5 years, the average amount of profit gained by BBC per bicycle sale has decreased by less than 50 percent.
(E)The proportion of bicycle market occupied by bicycles of BBC has not decreased over the last 5 years.
I am finding the argument difficult to understand appreciate if some one could explain. I will post the OA soon.
Hi guerrero25 and nitin. I'm glad to help.
This question is tough, it requires you to have some business knowledges.
ANALYZE THE STIMULUS:Fact: Total
sales increased to twice what they were 5 years ago.
KEY WORD: sales increased twice or 200%.Fact: Sales of certain types of bicycles, for which the new material is not used have remained constant or have decreased.
Conclusion: The total amount of profits of BBC must have increased dramatically over the last 5 years.
Two important formulas:KEY FORMULA #1: PROFIT MARGIN = TOTAL PROFIT / SALES
KEY FORMULA #2: TOTAL PROFIT = PROFIT MARGIN x SALESAnalyze the case by using example:Before: Sales: 100; profits: 10 ==> profit margin = profits/sales = 10/100 = 0.1
After 5 years: Sales: 200 (twice); profit: x ==> profit margin = profits/sales = x/200
In order to conclude Total profit (X) increased dramatically,
(1) X must be greater than 10--OR—
(2) initial ratio profits/sales = 10/100 must reduce less than 50%. If it reduces greater than 50% (say reduces 60%) to 0.1*(100% - 60%) = 0.04.
Thus, total profit = profits margin ratio x Sales = 0.04 x 200 = 8 < 10. The conclusion fails.
ANALYZE EACH ANSWER:(A)Increased sales always result in increased profits.
Wrong. Sales increases but profit margin decreases ==> total profit decreases. (see formulas above)
(B)BBC bicycles are not significantly more expensive than 5 years ago.
Wrong. Does not help. Why type of bicycle does not increase price? The one used new material or the one not used new material? You don’t know ==> What if bicycles that are used material do not increase prices (but their costs are high) Total profit may decrease.
(C)Over the last 5 years, total sales of BBC racing bicycles did not decrease by more than 70 percent.
Wrong. The stimulus clearly says total sales increase twice, so option is meaningless.
(D)Over the last 5 years, the average amount of profit gained by BBC per bicycle sale has decreased by less than 50 percent.
Correct. As stated above. If profit margin reduces less than 50%, but total sale increases 200% ==> total profit increases for sure.
(E)The proportion of bicycle market occupied by bicycles of BBC has not decreased over the last 5 years.
Wrong. TEMPTING. Although the market share of BBC has not decreased, total profit may decrease if profit margin reduces. (See formulas above)
Hope it helps