If a firm currently has excess capacity,then using the percent of sales method to forecast its fixed asset balance will likely result in an overestimate of the fixed asset balance and an inflated amount of discretionary financing needed.

Question

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The percent of sales method assumes a fixed relationship between sales and fixed assets, but if a firm has excess capacity, it may not need to invest in additional fixed assets to support future sales growth. Therefore, the use of this method may result in an overestimate of the needed fixed asset balance and discretionary financing, leading to an inflated amount of financing needed.

If a Firm Currently Has Excess Capacity,then Using the Percent