When economies of scale exist,the percent of sales method will overestimate the assets required and therefore overestimate the amount of discretionary financing needed.

Question

Quizplus · Accepted Answer

Economies of scale mean that as a company grows, the cost per unit of production decreases, leading to more efficient asset utilization. Therefore, using the percent of sales method, which doesn't account for this increased efficiency, will likely overestimate the assets and financing needed as sales grow.

When Economies of Scale Exist,the Percent of Sales Method Will