NIMCET 2025 Logical Reasoning Question 55 with Solution

Question 55

Logical Reasoning Data Sufficiency / Interpretation Medium

Average Cost (AC) is defined as the sum of Average Fixed Cost (AFC) and Average Variable Cost (AVC), and dumping is defined as selling a product at a price less than AC but more than AVC. A company in India, suddenly, found that the demand for its product 'ZOOM' has fallen to 60% of the output produced in that financial year. As a result, the company must sell 40% of the produced output in a foreign market. If it decides to 'dump' 40% of its output in a neighbouring country (by reducing the price by 20%), what would be the objective of its 'dumping strategy', among the following? (The company has set a profit margin of 10% of AC while fixing the price of its product for sale in India). $$ \text{(a) To minimize losses} $$ $$ \text{ (b) to maximize profits } $$ $$ \text{ (c) to contribute to the recovery of fixed costs } $$ $$ \text{ (d) to contribute to the recovery of variable costs } $$

(A) (a) and (c)

(B) (b) and (d)

(C) (a) and (b)

(D) (b) and (c)

View Dynamic Solution & Explanation ▼

Correct Solution: Option A

Step-by-step Solution:

Analysis of the Business Strategy

To determine the objective of the company's 'dumping strategy', we need to understand the economic definitions provided and the financial implications of the company's actions.

1. Understanding the Key Terms

Average Cost (AC) = Average Fixed Cost (AFC) + Average Variable Cost (AVC). This is the total cost per unit.
Dumping is defined as selling a product at a price (P) that is below the Average Cost but above the Average Variable Cost (i.e., AVC < P < AC).

2. Analyzing the Company's Situation

The company has a surplus of 40% of its output. By deciding to "dump" this surplus, they are choosing to sell it at a price that is lower than their total cost per unit (AC) but still higher than the variable cost to produce each unit (AVC).

Because the selling price is less than the Average Cost (P < AC), the company is making a loss on each item it dumps. Therefore, the strategy cannot be to "maximize profits" (b).
Because the selling price is greater than the Average Variable Cost (P > AVC), for each item sold, the company recovers the entire cost of producing that specific item (the variable cost) and has some money left over.

3. Evaluating the Objectives

Let's look at the options based on this analysis:

(a) To minimize losses: This is a core objective. If the company couldn't sell the surplus 40% of its output at all, it would lose all the money spent on producing it (both fixed and variable costs). By dumping it, they recover the variable costs and some of the fixed costs, thus making the overall loss smaller than it would otherwise be.
(b) To maximize profits: This is incorrect. Selling goods for less than they cost to produce (P < AC) is a loss-making activity, not a profit-maximizing one.
(c) To contribute to the recovery of fixed costs: This is the mechanism by which losses are minimized. Since the price (P) is higher than the variable cost (AVC), the difference (P - AVC) is a positive contribution that goes directly toward paying off the fixed costs that would otherwise be completely lost on the unsold goods.
(d) To contribute to the recovery of variable costs: This is true, but it's an understatement. The price does more than just recover variable costs; it exceeds them. The primary objective of the revenue earned above the variable cost is to help cover fixed costs.

Conclusion

The most accurate objectives for this dumping strategy are to minimize the overall losses on the unsold inventory and, as a means to that end, to contribute to the recovery of fixed costs. Therefore, the statement is best supported by (a) and (c).