The Percent of Sales Method Does Not Accurately Estimate the Balances

question 26

Multiple Choice

The percent of sales method does not accurately estimate the balances for lumpy assets.Which of the following statements best describes the possible errors?

• A) If excess capacity exists, the percent of sales method will overestimate asset requirements.
• B) The percent of sales method consistently underestimates the forecasted balances of lumpy assets.
• C) The percent of sales method consistently overestimates the forecasted balances of lumpy assets.
• D) If fixed assets are utilized at full capacity currently, the percent of sales method will underestimate the forecasted fixed asset balance.

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Definitions:

Expected Return

The anticipated return on an investment, considering both the probability and the impact of different outcomes.

Portfolio Standard Deviation

A measure of the volatility of the returns on a portfolio, indicating the portfolio's overall risk level.

Countercyclical Stock

A type of stock whose performance is inversely related to the overall economic cycle, often performing better during economic downturns.