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Manufacturers have to do more than build large manufacturing plants to
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09 Feb 2022, 09:52
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Manufacturers have to do more than build large manufacturing plants to realize economies of scale. It is true that as the capacity of a manufacturing operation rises, costs per unit of output fall as plant size approaches “minimum efficient scale,” where the cost per unit of output reaches a minimum, determined roughly by the state of existing technology and size of the potential market. However, minimum efficient scale cannot be fully realized unless a steady “throughput” (the flow of materials through a plant) is attained. The throughput needed to maintain the optimal scale of production requires careful coordination not only of the flow of goods through the production process, but also of the flow of input from suppliers and the flow of output to wholesalers and final consumers. If throughput falls below a critical point, unit costs rise sharply and profits disappear. A manufacturer’s fixed costs and “sunk costs” (original capital investment in the physical plant) do not decrease when production declines due to inadequate supplies of raw materials, problems on the factory floor, or inefficient sales networks. Consequently, potential economies of scale are based on the physical and engineering characteristics of the production facilities—that is, on tangible capital—but realized economies of scale are operational and organizational, and depend on knowledge, skills, experience, and teamwork—that is, on organized human capabilities, or intangible capital.
The importance of investing in intangible capital becomes obvious when one looks at what happens in new capital-intensive manufacturing industries. Such industries are quickly dominated, not by the first firms to acquire technologically sophisticated plants of theoretically optimal size, but rather by the first to exploit the full potential of such plants. Once some firms achieve this, a market becomes extremely hard to enter. Challengers must construct comparable plants and do so after the first movers have already worked out problems with suppliers or with new production processes. Challengers must create distribution networks and marketing systems in markets where first movers have all the contacts and know-how. And challengers must recruit management teams to compete with those that have already mastered these functional and strategic activities.
Question 1
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Question Stats:
83% (03:35) correct
17% (05:20) wrong based on 12 sessions
1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must
A. be the first in the industry to build production facilities of theoretically optimal size B. make every effort to keep fixed and sunk costs as low as possible C. be one of the first to operate its manufacturing plants at minimum efficient scale D. produce goods of higher quality than those produced by direct competitors E. stockpile raw materials at production sites in order to ensure a steady flow of such materials
Question 2
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83% (01:19) correct
17% (00:49) wrong based on 12 sessions
2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?
A. The extent to which they are determined by market conditions for the goods being manufactured is frequently underestimated. B. If they are kept as low as possible, the manufacturer is very likely to realize significant profits. C. They are the primary factor that determines whether a manufacturer will realize economies of scale. D. They should be on a par with the fixed and sunk costs of the manufacturer’s competitors. E. They are not affected by fluctuations in a manufacturing plant’s throughput.
Question 3
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64% (01:11) correct
36% (00:36) wrong based on 14 sessions
3. In the context of the passage as a whole, the second paragraph serves primarily to
A. provide an example to support the argument presented in the first paragraph B. evaluate various strategies discussed in the first paragraph C. introduce evidence that undermines the argument presented in the first paragraph D. anticipate possible objections to the argument presented in the first paragraph E. demonstrate the potential dangers of a commonly used strategy
Question 4
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75% (01:02) correct
25% (00:53) wrong based on 12 sessions
4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by
A. a mistake in judgment regarding the selection of a wholesaler B. a breakdown in the factory's machinery C. a labor dispute on the factory floor D. an increase in the cost per unit of output E. a drop in the efficiency of the sales network
Question 5
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A. point out the importance of intangible capital for realizing economies of scale in manufacturing B. show that manufacturers frequently gain a competitive advantage from investment in large manufacturing facilities C. argue that large manufacturing facilities often fail because of inadequate investment in both tangible and intangible capital D. suggest that most new industries are likely to be dominated by firms that build large manufacturing plants early E. explain why large manufacturing plants usually do not help manufacturers achieve economies of scale
Re: Manufacturers have to do more than build large manufacturing plants to
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24 Feb 2022, 00:50
1
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Official Explanation
1. The passage suggests that in order for a manufacturer in a capital-intensive industry to have a decisive advantage over competitors making similar products, the manufacturer must
Difficulty Level: Medium
Explanation
Inference
This question asks for an inference about what a manufacturer in a capital-intensive industry must do to have an advantage over competitors making similar products. The passage addresses this question by stating that advantage accrues to those firms that are the first to exploit the full potential of optimally sized, technologically sophisticated plants. In this context, exploiting the full potential of such plants means operating them at minimum efficient scale. Based on the definition in the first paragraph, this means that the plant must have an output of such a size that the cost per unit of output is at a minimum.
A. The passage says that for new capital-intensive firms to dominate the market, it is not enough for them to have optimally sized plants; the plants must also be operated in a way that fully exploits their potential.
B. While keeping fixed and sunk costs low would obviously help keep overall costs low, the passage does not suggest that this is decisive in enabling a firm to have an advantage over competitors.
C. Correct. Being among the first manufacturers to operate plants at minimum efficient scale means that those plants are being exploited to their full potential. This strategy would most likely give such manufacturers a decisive advantage over new firms hoping to compete effectively.
D. The passage does not discuss the quality of goods made by manufacturers.
E. The passage does not suggest that stockpiling raw materials is the most efficient way to ensure a steady flow of raw materials into the manufacturing process, though the passage states that such a steady flow is a factor in achieving minimum efficient scale.
Re: Manufacturers have to do more than build large manufacturing plants to
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24 Feb 2022, 00:53
1
Expert Reply
Official Explanation
2. The passage suggests that which of the following is true of a manufacturer's fixed and sunk costs?
Difficulty Level: Easy
Explanation
Inference
This question asks about what the passage implies about fixed and sunk costs. The passage states that when production declines due to certain factors, such costs remain at the same level (which may be high), and the cost per unit produced (unit costs) rises sharply.
A. The passage discusses the impact of market conditions on determining what the optimal size of a manufacturing plant is (which affects fixed and sunk costs). But it makes no claim about the frequency with which such an impact is “underestimated.”
B. The passage emphasizes that failing to keep throughput at an efficiently high level reduces profitability because that failure results in increased cost per unit (to which, of course, the plant’s fixed and sunk costs contribute). But the passage does not claim that keeping aggregate fixed and sunk costs very low is necessary in order to have the most competitive production operation.
C. The passage emphasizes that the crucial factor in achieving economies of scale is efficient operation of the production facilities, not the size of the firm’s fixed and sunk costs (even though such costs are clearly in part determined by the size and design of the production facilities).
D. While a manufacturer’s fixed and sunk costs may be on a par with those of the manufacturer’s competitors, the passage provides no grounds for inferring that there is any need for them to be (for example, physical plants that employ different technologies may have different price tags).
E. Correct. According to the passage, “throughput” refers to the flow of materials through a plant. This flow can vary as a result of various factors, but fixed and sunk costs—financial resources already committed—remain the same regardless of such variation.
Re: Manufacturers have to do more than build large manufacturing plants to
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24 Feb 2022, 00:55
1
Expert Reply
Official Explanation
3. In the context of the passage as a whole, the second paragraph serves primarily to
Difficulty Level: Medium
Explanation
Evaluation
This question asks about the rhetorical function of the second paragraph. While the first paragraph argues that a crucial factor in achieving economies of scale is intangible capital, or organized human capabilities, the second paragraph uses the example of new capital-intensive manufacturing industries to help show that this is indeed the case.
A. Correct. The second paragraph provides an example that illustrates the claims made in the first paragraph. It discusses the way in which intangible capital—e.g., distribution networks, marketing systems, smooth production processes, and qualified management teams—enables manufacturers in new capital-intensive manufacturing industries to realize economies of scale and achieve market dominance.
B. The second paragraph does, in a sense, “evaluate” investment in intangible capital: it suggests that such investment is necessary. However, investment in intangible capital is the only strategy it discusses.
C. The second paragraph supports rather than undermines the first paragraph’s argument.D. Nothing in the second paragraph suggests that there are, or could be, any objections to the first paragraph’s argument.
E. The second paragraph discusses the potential positive outcomes of investing in intangible capital. It suggests that there might be negative consequences to not making such investments, but it does not indicate that avoiding such investments is a commonly used strategy.
Re: Manufacturers have to do more than build large manufacturing plants to
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24 Feb 2022, 00:58
2
Expert Reply
Official Explanation
4. The passage LEAST supports the inference that a manufacturer's throughput could be adversely affected by
Difficulty Level: Hard
Explanation
Application
This question may be best approached by using an elimination strategy—first finding the four choices that can reasonably be inferred from the passage, and then checking to make sure that the remaining choice cannot reasonably be inferred. This requires understanding the information the passage gives about throughput, then making inferences about what can cause throughput to drop. The passage defines throughput generally as the flow of materials through a plant and goes on to explain that it involves coordination of the production process itself, as well as obtaining materials from suppliers and marketing and distributing the manufactured products. Anything that damages this flow of materials and products would be said to have an adverse effect on throughput.
A. Making a poor judgment about a wholesaler would most likely have an adverse effect on throughput, in that it could affect the flow of output to wholesalers and final consumers.
B. A breakdown in machinery would likely fall into the category of problems on the factory floor mentioned in the passage and would likely prove damaging to throughput because of its effect on the production process itself.
C. A labor dispute would also likely fall into the category of problems on the factory floor mentioned in the passage and would probably cause a decline in production and thus adversely affect throughput.
D. Correct. The passage emphasizes that changes in throughput can cause increases or decreases in costs per unit. But the passage is not committed to any claims about how changes in costs per unit might affect throughput.
E. The passage suggests that inefficient sales networks could cause a decline in production. Thus a decrease in sales efficiency would most likely adversely affect a manufacturer’s ability to provide goods to consumers, and thus would create problems with throughput.
Re: Manufacturers have to do more than build large manufacturing plants to
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24 Feb 2022, 01:00
1
Expert Reply
Official Explanation
5. The primary purpose of the passage is to
Difficulty Level: Medium to Hard
Explanation
Main idea
This question depends on understanding the passage as a whole. In general, it makes an argument for investing in intangible capital as a way for manufacturers to realize economies of scale, and it supports its argument with an example.
A. Correct. The passage focuses on intangible capital as a crucial factor in realizing economies of scale.
B. According to the passage, manufacturers gain competitive advantage by building plants of optimal size that they then fully exploit; nothing in the passage suggests that large plants are frequently optimal.
C. The passage assumes that manufacturers invest appropriately in tangible capital and argues that it is important for them to invest in intangible capital as well.
D. The passage states that new capital-intensive manufacturing industries are dominated not by firms that are the first to build large plants, but by firms that exploit the full potential of their plants.
E. The passage indicates that economies of scale can be achieved in plants of optimal size. The passage does not suggest that large plants cannot be optimal.
09 Feb 2022, 09:52
83% (03:35) correct
