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#13 - A company with long-outstanding bills owed by its

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Complete Question Explanation

Assumption. The correct answer choice is (A)

The stimulus explains that companies sometimes turn long-outstanding bills over to collections agencies, but those agencies only pay 15% of the total amount of those bills. The stimulus concludes that if a company is interested in reducing losses, the company should pursue collections on its own.

The reasoning is that the company can do better than to collect 15% on the bills, which involves a number of assumptions about factors such as cost and the amount that the company could itself collect. You are asked to identify a necessary assumption, so you need to find a choice that addresses one of the many neglected factors.

Answer choice (A): This is the correct answer choice. For the company to even have a chance at doing better than a 15% payment from creditors, the company must first be able to collect more than 15% on its own, especially since the costs will be higher if the company pursues those collections on its own.

Answer choice (B): If the costs were more than 15% of the bills, a company still might collect so much more than 15% on its own that it offsets the costs (for example, if a company on its own collected 80% of what was due, and its costs were 50% of what is due, it would still be much better off than were it to use an agency).

Answer choice (C): Immediately, this choice is incorrect because you cannot be sure that information about collections agencies transfers well to the companies. Alternately, this choice implies that collections agencies are able to collect 85% of the outstanding bills. Since the companies only currently get 15%, they do not need 85% to be better off. The only thing you can be sure of is that they would need more than 15% to be better off.

Answer choice (D): Even if every single customer must be pursued to obtain payment, the company might still get more than 15% by pursuing collections on its own. This response is unnecessary and incorrect. Also, this choice is not even very logical support, because the customers who tend to pay could be the ones who owe very little, so even if 15% of delinquent customers would pay on their own, that does not necessarily mean those customers would account for 15% of the money that all the company's delinquent customers owe the company.

Answer choice (E): The stimulus concerns only delinquent accounts, and never describes what percent of customers tend to be delinquent. This choice, which discusses the proportion of customers that must pay for the company to be profitable, is off-topic and incorrect.
jrc3813
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Are we to assume that companies don't pay the collection agencies any fees? If they did then A wouldn't be correct, right? If the cost to pursuing bills on one's own was less than the collection agency fee then the company could collect less than 15 percent and still come out ahead possibly. I guess it's sort of a common sense assumption? If the collection agency gets to keep the other 85 percent then that's their payment. A fee on top of that would be a bit absurd. Is that right?
Francis O'Rourke
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The stimulus tells us about the arrangement between the companies and the collection agencies. The collection agency pays the company 15% of the outstanding bills in order to win the collection rights. The agencies are paying the companies upfront for the debt.

From that I believe that we can assume that the companies do not pay the agencies anything at the same time. There is nothing explicitly preventing the companies from paying the agencies a fee, but it would be rather odd in a business transaction for a seller to pay a fee to a buyer at the same time that a buyer is paying the seller for a product.

If this arrangement were to happen, then answer choice (A) would not be a necessary assumption. If a company paid, for example, a 1% fee then the company is losing 86% of the value of the bills. In this case, we can assume that the company only needs to return at least 14% by pursuing debtors on its own.
jrc3813
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Francis O'Rourke wrote:The stimulus tells us about the arrangement between the companies and the collection agencies. The collection agency pays the company 15% of the outstanding bills in order to win the collection rights. The agencies are paying the companies upfront for the debt.

From that I believe that we can assume that the companies do not pay the agencies anything at the same time. There is nothing explicitly preventing the companies from paying the agencies a fee, but it would be rather odd in a business transaction for a seller to pay a fee to a buyer at the same time that a buyer is paying the seller for a product.

If this arrangement were to happen, then answer choice (A) would not be a necessary assumption. If a company paid, for example, a 1% fee then the company is losing 86% of the value of the bills. In this case, we can assume that the company only needs to return at least 14% by pursuing debtors on its own.


Thanks, sometimes it's good to just trust your common sense I suppose!
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Are considerations on the costs involved in pursuing its debtors on its own necessary to the argument? I chose A simply only thinking about the ability of the company in collecting debts (and its being better in doing so).
Shannon Parker
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The costs associated with pursuing the debts, are the first thing i thought of as well, in my rephrase. Answer choice B tries to pull a fast one by inverting that thought. Answer choice C and D also try to confuse us by "playing" with the 15% label. Answer choice E is irrelevant to the conclusion.

Answer choice A does not discuss the cost to a company in pursuing its own debtors, yet it is correct. This is because there could be more assumptions on which the argument relies, but we are only asked identify one. In answer choice A we are provided the assumption that the company can typically collect more than 15% of the amount owed by the debtor. If they cannot, they would not be reducing losses by pursuing those debtors on their own because they could just assign them for the 15%.

Hope this helps.
Shannon