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     Home >> GMAT >> Essays >> Essay - 104


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    The following appeared as part of a memorandum from the loan department of the Frostbite National Bank. “We should not approve the business loan application of the local group that wants to open a franchise outlet for the Kool Kone chain of ice cream parlors. Frostbite is known for its cold winters, and cold weather can mean slow ice cream sales. For example, even though Frostbite is a town of 10,000 people, it has only one ice cream spot — the Frigid Cow. Despite the lack of competition, the Frigid Cow’s net revenues fell by 10 percent last winter.” Discuss how well reasoned . . . etc.

       In this memorandum the loan department of Frostbite National Bank recommends against approval of a business loan to a local group that wants to open an ice cream parlor. In support of this decision the loan department points out that Frostbite has a reputation for cold winters and sales of ice cream decrease in cold weather. This latter point is buttressed by the fact that Frostbite’s only ice cream parlor suffered a 10 percent decline in net revenues the previous winter. The loan department’s decision is questionable for the following reasons.

    To begin with, since it is reasonable to expect a decline in ice cream sales during winter months, it is difficult to assess the relevance of the fact that Frostbite has cold winters to the potential success of the Kool Kone franchise. Common sense suggests that this fact would be significant only if it turned out that Frostbite’s winter season lasted 9 or 10 months as it does in arctic regions. In that case slow sales could be expected for most of the year and the loan department’s opposition to the loan would be readily understandable. If, on the other hand, Frostbite’s winter season lasts only a few months and the remainder of the year is warm or hot, it is difficult to comprehend the loan department’s reasoning.

    Next, the loan department assumes that the Frigid Cow’s decline in net revenue last winter was a result of slow sales occasioned by cold weather. While this is a possible reason for the decline, it is not the only factor that could account for it. For example, other factors such as poor business practices or lack of inventory could be responsible for the Frigid Cow’s loss of revenue. The loan department’s failure to investigate or even consider these and other possible explanations for the Frigid Cow’s decline in revenue renders their decision highly suspect.

    In conclusion, the loan department’s decision is ill-founded. To better evaluate the decision, we would need to know more about the length and severity of Frostbite’s winter season. Moreover, evidence would have to be provided to support the assumption that the Frigid Cow’s loss of revenue last winter was a direct result of the cold weather.


     



     


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