PrepTest 157, Section 3, Question 18
Consumer demand for personal computers continues to increase(50 more words not shown)
Each of the following, if(11 more words not shown)
- ARapid innovation in(11 more words not shown)
- BSatisfaction with their(13 more words not shown)
- CA customer needs(16 more words not shown)
- DMany retail stores(18 more words not shown)
- EAn increase in(15 more words not shown)
Reading the argument
Having more customers doesn't guarantee a large profit on each sale.
Maybe demand for computers attracts more sellers, and those sellers compete by cutting prices. Or maybe a store is willing to make a small amount on each computer because it can sell thousands of them. A camera sold in smaller numbers might need a larger margin to make the business worthwhile. Those are ways growing demand could coexist with a low margin.
Be clear about what the passage measures. Profit margin is the share of sales revenue left as profit, not simply the number of computers sold or the total dollars earned. Selling more units could produce a healthy total profit even when only a small share of each sale is profit.
What we’re looking for
The question asks for the exception: four answers help explain the low margin, and one doesn't. My initial thoughts are competition and making money through volume. But other explanations can work too. We should test each answer against the low margin rather than reject it just because it differs from our first guesses.
Working the answers
- A
Stock that may soon become obsolete gives a store a reason to sell quickly. Imagine a new model arriving next year while last year's computers are still on the shelf. The store may accept a lower price now instead of being stuck with outdated stock later. That pressure can help explain a low margin despite strong demand for computers generally.
- BCorrect
Customers staying loyal to a brand doesn't explain why retailers retain so little profit on computer sales. If anything, liking a brand could make a buyer willing to pay more for it. Brand loyalty also isn't the same as loyalty to a particular store: customers could buy the preferred brand from different retailers. This fact supplies no mechanism for the unusually low retail margin, so it is the exception.
- C
This can initially feel backward. If customers need lots of help, shouldn't stores charge more to cover the employees' time? That would be one possible response, but the answer doesn't say they actually manage to raise prices enough. More employee help also means more labor expense.
That's the connection that resolves the puzzle: money spent helping customers isn't money left as profit. Imagine a $1,000 sale with $900 in other costs. There would be $100 left before an additional $80 labor cost; after that expense, only $20 remains. The numbers are illustrative, but they show how extra service costs can shrink the margin. C therefore helps explain the low profit share, rather than joining B as another exception.
- D
The low-priced computer can bring someone into the store who then buys software, a mouse, or a keyboard. The store may accept a small profit on the computer because it expects to earn money on those other purchases. We don't need to assume it loses money on the computer. A deliberately small margin already explains the reported pattern.
- E
This fits the initial competition idea. More discount outlets give customers more places to find a low price, putting pressure on stores to cut their own prices. Demand can rise while competition prevents sellers from keeping a large profit on each sale. Higher demand doesn't erase that competition.
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