The Acme Accounting firm has laid off 20 percent of its corporate staff due to declining profits in the prior...

GMAT Critical Reasoning : (CR) Questions

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The Acme Accounting firm has laid off 20 percent of its corporate staff due to declining profits in the prior fiscal year. These layoffs substantially reduced operating expenses, which had been higher than those of most other accounting firms of similar size that offer similar services. However, a consultant hired by Acme predicted that these layoffs would not result in a net profit for Acme.

Which of the following, if true, would provide the strongest justification for the consultant's prediction?

Acme's net profits were already lower than those of other accounting firms of similar size.

Acme did not lay off any staff from several departments that have relatively high operating expenses.

Accounting firms that hire some of the laid-off staff will probably acquire some of Acme's clients.

An accounting firm that is substantially larger than Acme experienced lower profits after having laid off 20 percent of its corporate staff.

The most profitable accounting firms have been able to reduce operating expenses without resorting to layoffs.

Solution

Passage Analysis:

Text from Passage	Analysis
The Acme Accounting firm has laid off 20 percent of its corporate staff due to declining profits in the prior fiscal year.	What it says: Acme cut 20% of staff because profits dropped last year What it does: Sets up the basic situation and explains why layoffs happened What it is: Background information/context Visualization: Staff Before: 100 people → Staff After: 80 people (20% reduction)
These layoffs substantially reduced operating expenses, which had been higher than those of most other accounting firms of similar size that offer similar services.	What it says: The layoffs cut costs a lot, and Acme's expenses were higher than competitors before What it does: Shows the positive effect of layoffs and reveals Acme had a cost problem What it is: Author's explanation of consequences Visualization: Acme expenses: $500k vs Competitors: $400k → After layoffs: $400k
However, a consultant hired by Acme predicted that these layoffs would not result in a net profit for Acme.	What it says: Despite cost cuts, a consultant says Acme still won't make a net profit What it does: Introduces the surprising main claim that contradicts what we'd expect What it is: Expert prediction/main conclusion

Argument Flow:

The argument starts by explaining Acme's situation (layoffs due to profit decline), then shows the apparent positive effect (reduced expenses), but ends with a consultant's surprising prediction that contradicts our expectations.

Main Conclusion:

A consultant predicts that Acme's layoffs will not result in a net profit for the company.

Logical Structure:

This is actually setting up a puzzle rather than a complete argument. We're told layoffs should help (by cutting high expenses), but an expert says they won't lead to profit. The question asks us to find what would justify this counterintuitive prediction, meaning we need to find downsides to layoffs that outweigh the cost savings.

Prethinking:

Question type:

Strengthen - We need to find information that would make the consultant's prediction more believable. The consultant says that despite cutting costs through layoffs, Acme still won't achieve net profit.

Precision of Claims

The key claim is very specific - 'these layoffs would not result in a net profit for Acme.' This is about the overall financial outcome (net profit) specifically resulting from the layoff action, not just whether Acme will be profitable in general.

Strategy

We need to find reasons why cost-cutting through layoffs might not lead to net profit. Even though layoffs reduce expenses (which should help profitability), there must be some offsetting negative effects or additional costs that would prevent net profit. We should think about hidden costs of layoffs, lost revenue from reduced capacity, or other consequences that could outweigh the expense savings.

Answer Choices Explained

Acme's net profits were already lower than those of other accounting firms of similar size.

This tells us about Acme's past performance compared to competitors, but it doesn't explain why the layoffs specifically wouldn't result in net profit. Even if Acme's profits were already lower, reducing expenses through layoffs should still improve their position toward profitability. This doesn't justify the consultant's prediction about the layoffs' ineffectiveness.

Acme did not lay off any staff from several departments that have relatively high operating expenses.

This suggests Acme kept some high-expense departments intact, which means they didn't cut costs as much as they could have. However, the passage already tells us the layoffs 'substantially reduced operating expenses,' so this doesn't explain why those substantial reductions wouldn't lead to net profit. The cost savings still occurred, just not maximally.

Accounting firms that hire some of the laid-off staff will probably acquire some of Acme's clients.

This directly explains why layoffs might backfire. If competitors hire Acme's laid-off staff and those staff members bring clients with them, Acme loses revenue that could exceed the cost savings from layoffs. This creates a clear mechanism by which layoffs could fail to produce net profit - the revenue loss outweighs the expense reduction. This strongly justifies the consultant's prediction.

An accounting firm that is substantially larger than Acme experienced lower profits after having laid off 20 percent of its corporate staff.

This provides an analogy about a larger firm experiencing lower profits after layoffs, but analogies are weak evidence. The larger firm might have different circumstances, client relationships, or market conditions. We can't reliably predict Acme's outcome based on what happened to a different, larger company.

The most profitable accounting firms have been able to reduce operating expenses without resorting to layoffs.

This discusses what the most profitable firms do (reduce expenses without layoffs), but it doesn't explain why Acme's layoffs specifically won't work. Just because other methods exist doesn't mean layoffs can't be effective. This doesn't justify the prediction that layoffs won't result in net profit.

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