One of the shortcomings of the percent of sales method is that it does not account for the fact that capacity changes are lumpy and not incremental.

Question

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The percent of sales method assumes that all costs and expenses will vary in proportion to sales. However, this assumption may not hold true when capacity changes are lumpy and not incremental. For example, if a company needs to increase production capacity by adding a new plant or investing in new equipment, the fixed costs involved in the expansion may not vary proportionally with sales. Therefore, the percent of sales method may not accurately reflect the true cost structure of a business undergoing capacity changes.

One of the Shortcomings of the Percent of Sales Method