If a firm determines it can use the percentage-of-sales method and it follows the procedure described in the textbook, then the net result is that each expense item on its income statement (with the exception of those items that can be individually forecast) will grow at the same rate as sales. This approach is called the ________.
A) continuous percentage method of forecasting
B) stable fraction method of forecasting
C) regular proportion method of forecasting
D) constant ratio method of forecasting
E) steady percentage method of forecasting

Question

Quizplus · Accepted Answer

The approach described in the question is called the constant ratio method of forecasting. This method assumes that each expense item on the income statement can be expressed as a percentage of sales, and that these percentages will remain constant. Therefore, as sales grow or shrink, each expense item will grow or shrink by the same percentage. This method is simple to apply and can provide a quick estimate of future expenses, but it does not take into account changes in the business environment or specific changes in expense items.

If a Firm Determines It Can Use the Percentage-Of-Sales Method