The Price the Government Pays for Standard Weapons Purchased from Military Contractors is Determined by a Pricing Method called “Historical Costing".

Question: The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing.” Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous year’s contractual price.

Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

(A) The government might continue to pay for past inefficient use of funds.
(B) The rate of inflation has varied considerably over the past twenty years.
(C) The contractual price will be greatly affected by the cost of materials used for the products.
(D) Many taxpayers question the amount of money the government spends on military contracts.
(E) The pricing method based on historical costing might not encourage the development of innovative weapons.

“The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called “historical costing".”- is a GMAT critical reasoning passage with answers. This particular GMAT critical reasoning topic has been taken from the book “GMAT Prep Plus 2019.”

Candidates need a strong knowledge of English GMAT critical reasoning. This GMAT critical reasoning question consists of a question and 5 options to choose from. The GMAT critical reasoning questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts.

Answer: A
Explanation: This is a GMAT critical reasoning question. We have to select the option that, if true, can be the best basis for a criticism of historical costing as an economically sound pricing method for military contracts.

Let’s go through each of the available options and choose the most suitable one.

Option A: The government might continue to pay for past inefficient use of funds.

This option is correct. If the government made a big mistake and overpaid accidently one year, then this pricing practice will force the government to continually overpay every year. This is obviously not economically sound. This option can be the basis for a critisicu, of historical costing as an economically sound pricing method for military contracts. Option A is correct.

Option B: The rate of inflation has varied considerably over the past twenty years.

This option is incorrect. It states that the rate of inflation has changed considerably over the past twelve years. This option does not present a problem with historical costing as we know that with historical costing practice. The percentage increase is based on the current inflation rate. It does not matter whether the inflation rate is changing. Option B is incorrect

Option C: The contractual price will be greatly affected by the cost of materials used for the products.

This option is incorrect. According to this option, the base contractual price can be changed based on different materials, but this policy will hold the price of these materials constant and add inflation. This definitely does not make it economically unsound. Option B is incorrect.

Option D: Many taxpayers question the amount of money the government spends on military contracts.

This option is incorrect. This option is totally irrelevant to our question. The decision of whether a pricing method is economically sound is not dependent on how the taxpayers feel about government spending on military contracts. So, Option D is incorrect.

Option E: The pricing method based on historical costing might not encourage the development of innovative weapons.

This option is incorrect. In this question, we are only talking about the “price” and how to calculate it correctly. There is nothing mentioned about “innovative”, which makes this option irrelevant to the question. This is out of scope. So, Option E is incorrect.

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