Due to the no fixed costs assumption in the percent-of-sales method, the use of cost and expense ratios generally tends to understate profits when sales are increasing and overstate profits when sales are decreasing.

Question

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This is because the cost and expense ratios will remain constant despite changes in sales, which will result in a proportionally smaller or larger amount of expenses being allocated to a larger or smaller sales base.

Due to the No Fixed Costs Assumption in the Percent-Of-Sales