Hotco oil burners, designed to be used in asphalt plants, are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the cost savings between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years. On installation, the plant will make an estimated payment, which will be adjusted after two years to equal the actual cost savings.
Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above?
(A) Another manufacturer’s introduction to the market of a similarly efficient burner
(B) The Clifton Asphalt plant’s need for more than one new burner
(C) Very poor efficiency in the Clifton Asphalt plant’s old burner
(D) A decrease in the demand for asphalt
(E) A steady increase in the price of oil beginning soon after the new burner is installed
Solution
Passage Analysis
Hotco oil burners, designed to be used in asphalt plants, are so efficient that Hotco will sell one to the Clifton Asphalt plant for no payment other than the cost savings between the total amount the asphalt plant actually paid for oil using its former burner during the last two years and the total amount it will pay for oil using the Hotco burner during the next two years.
The argument starts by telling us about Hotco oil burners. Hotco oil burners are designed to be used in asphalt plants. These burners are so efficient that Hotco will sell one to the Clifton Asphalt plant for an amount that will be based on the Clifton plant’s cost savings. This amount will be calculated according to the cost savings between the amount paid for the oil the plant used during the last two years and the amount the plant will pay using the Hotco burner for the following two years i.e
Payment to Hotco = Price paid for oil in the last two years using older burner – Price paid for oil in the next two years using Hotco burner
From this statement, it is clear that Hotco is expecting the Clifton plant to spend significantly less on oil during the next two years compared to the amount than it spent on oil in the previous two years, when it was using its old burner. So, Hotco seems confident that its burner is so efficient that it will need to use less oil that Clifton’s former burner did.
On installation, the plant will make an estimated payment, which will be adjusted after two years to equal the actual cost savings.
This statement says that when the burner is installed at Clifton, Clifton will make an estimated payment to Hotco. Based on the previous statement, we can infer that this estimate will be based on the amount paid for oil during the last two years, and the amount Clifton expects to pay for oil during the next two years. This amount will be adjusted after two years to equal the actual cost savings.
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Pre-thinking
The question stem asks us which of the options would constitute a disadvantage for Hotco of the plan described in the passage. What would constitute a disadvantage for Hotco? It would be a disadvantage for Hotco if Clifton’s actual cost savings over the next two years are less than the estimated cost savings. In this case, the amount given to Hotco will be less than the estimated cost savings. So, it would be a disadvantage for Hotco if Clifton spends more than expected on oil during the next two years.
In formulating this plan, Hotco has only taken the amount of oil used by Clifton as the basis of the arrangement. Are there any scenarios in which something other than the amount of oil could affect Clifton’s cost savings? There are at least two scenarios in which Hotco would be at a disadvantage. One scenario would be that Clifton’s former burner was also very efficient, and that the plant is already functioning at a very high level of efficiency. In such a case, replacing the former burner with the Hotco burner may not result in a significant difference in cost savings for Clifton.
Another scenario would be that there is an increase in the price of oil. In formulating its plan, Hotco has considered only the amount of oil used. If the price of oil increases, then even if Clifton reduces its use of oil because of the efficiency of the Hotco burner, its cost savings could be less than they would have been if the price of oil had decreased or remained the same.
Analysis of Option Statements
Which of the following, if it occurred, would constitute a disadvantage for Hotco of the plan described above?
(A) Another manufacturer’s introduction to the market of a similarly efficient burner
Even if another manufacturer introduces a burner that is similar in efficiency to the Hotco burner, this will not be a disadvantage for Hotco since its burner is already installed at Clifton. So, this choice is incorrect.
(B) The Clifton Asphalt plant’s need for more than one new burner
If Clifton needs another burner, this would not affect the cost savings for the burner that has already been installed. The plan discussed in the argument refers only to the burner that Clifton has already acquired from Hotco. Whether it needs additional burners does not affect the plan.
(C) Very poor efficiency in the Clifton Asphalt plant’s old burner
This choice is the opposite of what we came up with in our first prethinking scenario. If the old burner was very poor in efficiency, then the Hotco burner can lead to greater efficiency and significant reduction in the amount of oil used by Clifton. These savings would go to Hotco, so it would be an advantage for Hotco if the old burner was not very efficient.
(D) A decrease in the demand for asphalt
What would happen if the demand for asphalt decreases? Clifton is a manufacturer of asphalt, so its profits would probably decrease if the demand were to decrease. However, its arrangement with Hotco is not based on its profits, but rather on the amount that it saves on oil. So, if the demand for asphalt decreases, the amount of oil used by Clifton to manufacture asphalt would likely decrease. If the amount of oil decreases, Clifton’s cost savings on oil would be more than they had been for the previous two years. In this case, it would be an advantage for Hotco, not a disadvantage.
(E) A steady increase in the price of oil beginning soon after the new burner is installed
This choice is in line with our second prethinking scenario. If the price of oil steadily increases after the new burner is installed, then Clifton will spend more than estimated on buying oil. So, its cost savings will decrease and the amount it gives Hotco will go down. This is the correct answer.
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