Passage 42
Modern manufacturers, who need reliable sources of materials and technologically¹ advanced
components³ to operate profitably, face an increasingly difficult choice between owning the
producers of these items (a practice known as backward integration⁵) and buying from independent
producers. Manufacturers who integrate may reap short-term rewards, but they often restrict their
future capacity for innovative⁶ product development.
Backward integration removes the need for some purchasing and marketing⁷ functions, centralizers
overhead, and permits manufacturers to eliminate duplicated efforts in research and development.
Where components are commodities (ferrous metals or petroleum⁸, for example), backward
integration almost certainly boosts profits. Nevertheless, because product innovation means
adopting the most technologically advanced and cost-effective ways of making components,
backward integration may entail⁹ a serious risk for a technologically active company-for example,
a producer of sophisticated consumer electronics.
A company that decides to make rather than buy important parts can lock itself into an outdated
technology. Independent suppliers may be unwilling¹⁰ to share innovations with assemblers with
whom they are competing. Moreover, when an assembler sets out to master the technology of
producing advanced components, the resulting demands on its resources may compromise its
ability to assemble these components successfully into end products. Long-term contracts with
suppliers can achieve many of the same cost benefits as backward integration without
compromising a company’s ability to innovate¹¹.
However, moving away from backward integration is not a complete solution either. Developing
innovative technologies requires independent suppliers of components to invest huge sums in
research and development. The resulting low profit margins¹² on the sale of components threaten the
long-term financial stability of these firms. Because the ability of end-product assemblers to
respond to market opportunities depends heavily on suppliers of components, assemblers are often
forced to integrate by purchasing the suppliers of components just to keep their suppliers in
business.
 
257. According to the passage, all of the following are benefits associated with backward
integration EXCEPT:
(A)   improvement in the management of overhead expenses
(B)    enhancement of profit margins on sales of components
(C)    simplification of purchasing and marketing operations
(D)    reliability¹³ of a source of necessary components (B)
(E)     elimination¹⁴ of unnecessary research efforts
 
258. According to passage, when an assembler buys a firm that makes some important component⁴
of the end product that the assembler produces, independent suppliers of the same component may
(A)   withhold¹⁵ technological² innovations from the assembler
(B)    experience improved profit margins of on sales of their products
(C)    lower their prices to protect themselves from competition
(D)    suffer finanical difficluties and go out of business (A)
(E)     stop developing new versions of the component
 
259. Which of the following best describes the way the last paragraph functions in the context of
the passage?
(A)   The last in a series of arguments supporting the central argument of the passage is presented.
(B)    A viewpoint is presented which qualifies one presented earlier in the passage.
(C)    Evidence is presented in support of the argument developed in the preceding paragrap.
(D)    Questions arising from the earlier discussion are identified as points of departure for further study of the topic. (B)
(E)     A specific example is presented to illustrate¹⁶ the main elements of argument presented in the earlier paragraphs.
 
260. According to the passage, which of the following relationships between profits and
investments in research and development holds true for producers of technologically advanced
components?
(A)   Modest investments are required and the profit margins on component sales are lowl.
(B)    Modest investments are required but the profit margins on component sales are quite high.
(C)    Despite the huge investments that are required, the profit margins on components sales are high.
(D)    Because huge investments are required, the profit margins on component sales are low. (D)
(E)     Long-term contractual relationships with purchasers of components ensure a high ratio of profits to investment costs.

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