Formulas aren’t just for quant questions; they’re a fundamental part of business. Revenue and cost, price and sales, imports and exports – These mathematical relationships underpin the business world, and when they appear in critical reasoning questions, they signal opportunities to cash in on some easy points.
Critical reasoning questions often build arguments with common business formulas, and if you recognize the formula, you can easily spot any faulty assumptions. Let’s start by reviewing the common business formulas found on the GMAT.
Common business formulas
Revenue – Costs = Profit
Price x Sales = Revenue
Imports – Exports = Trade Deficit
Spending – Revenue = Spending Deficit
Wage x Time Worked = Total Salary
These are the ABCs of business. Every aspiring MBA candidate should know them, and not surprisingly, the GMAT considers them common knowledge. That means if any question mentions one of these terms, you should be able to fill in the rest of the equation. If a problem solving question were to ask you to calculate total profit, you should know that you’d need to first find total revenue and total cost.
Spot the assumption by looking for the missing variable
These business formulas are all three variable equations. If you were tasked with solving any of them mathematically, you’d need to know the value of two of the variables. For example, if you knew that a company’s revenue for 2014 was $5 million, you couldn’t calculate its profit without knowing its costs or vice versa.
However, critical reasoning questions will often pass over one of the variables in the formula. A question will contain information about one variable and then make a claim about another variable while ignoring the third variable.For example, a question may argue that a country’s trade deficit is growing because its imports are increasing. Given a quick read, this seems to make sense, but it relies on the assumption that imports aren’t also growing. If exports are also growing to same degree that imports are, the trade deficit is not growing.
In critical reasoning questions that base their argument on these equations, the critical assumption will always involve the missing variable. Spot the missing variable and you find the argument’s flaw.
Here’s another example:
Next year, a new law that raises the national minimum wage will go into effect. Taco Whistle, one of the nation’s largest employers of minimum wage workers, expect their cost of operations to rise sharply with the new wages. In order to compensate for the increased cost the company plans to raise the price of all their menu items.
Which of the following, if true, provides the best evidence that the company’s plan is flawed?
(A) The company’s revenue has remained stagnant for the last two years.
(B) Costumers cite Taco Whistle’s affordable menu as the primary reason they eat there.
(C) New automation will reduce the number of employees who work at Taco Whistle
(D) The new minimum wage will only be a dollar-fifty more than the previous minimum wage
(E) The company’s latest ad campaign has been successful in driving new customers to the chain
The argument references two of the common formulas: revenue – cost = profit and price x sales = revenue. The conclusion is that by raising the price of menu items the company will generate more revenue. What must be true in order for this conclusion to be true?
Just look at the formula for revenue: price x sales = revenue. The company plans to make a change to one variable in the equation, i.e. they plan to increase price, and based on this change they expect revenue to also increase. What’s missing is sales. In order for their plan to work, sales must remain constant or increase. If sales fall, the outcome the company expects may not happen. This is the argument’s flaw.
As we explained in our article on assumptions, once you know an argument’s assumption(s), you can predict the correct answer according to the question’s prompt. This question asks you to find something that would weaken the company’s plans. To weaken an argument, find information that suggests the assumption is false.
In this example, if Taco Whistle’s affordable menu is why customers frequent the chain, then it’s reasonable to believe that an increase in price will lead to lower sales and revenue could stagnate or decline (given that the decline in sales is great enough). The correct answer then is B.
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