Due to the no fixed costs assumption underlying the strict 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.

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The strict percent-of-sales method assumes that costs and expenses vary directly with sales, and no fixed costs are involved. Therefore, when sales increase, costs and expenses also increase proportionally, leading to understating profits. Conversely, when sales decrease, costs and expenses decrease proportionally, leading to overstating profits.

Due to the No Fixed Costs Assumption Underlying the Strict