GMAT Critical Reasoning
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 w-II 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.
Correct Answer: A