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 Utility

A strategy in economics and game theory where individuals choose the option with the highest expected benefit, taking into account all future outcomes.

Risk-neutral

Refers to a mindset or condition where an individual or entity is indifferent to risk when making investment decisions, focusing instead on the potential returns without giving additional weight to the possibility of loss.

Expected Utility

a theory in economics that quantifies how choices are made when outcomes are uncertain, aiming to maximize the expected utility rather than merely the expected monetary value.

Marginal Utility

The additional satisfaction or benefit (utility) a consumer receives from consuming one more unit of a good or service.