A Company Determines its Yearly Profits by Deducting its Operating Expenses from its Revenue for that Year.

Question: A company determines its yearly profits by deducting its operating expenses from its revenue for that year. Company X manufactures only widgets and gadgets. Company X's profits for this year are significantly higher than those for last year, although the company's operating expenses remained the same and the company sold the same number of widgets and gadgets as it did last year.

The statements above, if true, best support which of the following conclusions?

1. Consumers purchased more widgets and gadgets this year than they did last year.
2. Company X has raised the price of its widgets or of its gadgets since last year.
3. Company X's main competitors sold fewer widgets and gadgets this year than they did Company X.
4. Company X introduced a new type of widget this year.
5. Company X spent more on advertising this year than it did last year.

Answer: B
Solution and Explanation:

As per the topic, we need to find out which conclusion supports the facts in this GMAT critical reasoning question.

1. The 4 elements of Profitability equation

1. Profit = (SP – CP) * No. of Units

1. Profit
2. Selling Price per unit
3. Cost Price per unit
4. The number of units sold

2. If one element changes, in a certain period, it will also force at least one of the other elements to change. For example, Profit could increase because of

1. An increase in unit selling price, or
2. A decrease in unit cost price, or
3.  An increase in the number of units sold in the period
4. In the given argument, we are told that operating expenses remained same. Thus (ii) could not have happened.
5. Since (iii) also did not take place, the only thing that must have changed is (i)

Inference: Company X raised the price/s of its product/s this year.

Now, we will look at the options one at a time.

1. Consumers purchased more widgets and gadgets this year than they did last year.
   As per the passage, the consumers did not purchase more widgets and gadgets this year from Company X than they did last year. This means that they might have purchased more widgets and gadgets from other companies. However, we cannot certainly infer that information from the passage. Hence, this is an incorrect option.
2. Company X has raised the price of its widgets or of its gadgets since last year.
   This option says the same thing that we have inferred from the passage. The profits are higher than those for last year, though the same amount of things were sold. This means, if the price were same, the profit would have been same. Since the profit increased, means the price was raised. Hence, B is the correct answer.
3. Company X's main competitors sold fewer widgets and gadgets this year than did Company X - We do not have any such information from the passage. Since there is no data, we will not be able to conclude if the competitors sold fewer gadgets. Hence, this is an incorrect choice..
4. Company X introduced a new type of widget this year. - The passage does not speak about the introduction of new gadget. It says that the same amount was sold as previous year. This could mean same gadgets or new gadgets. However, since there is no clarity, we will not be able to accept this as the right choice.
5. Company X spent more on advertising this year than it did last year.
   If we consider advertising costs as a part of the operating costs, then this choice is just the opposite of the data given in the passage. Except this, we do not get any other information, making this not the right choice.

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