Percentage of Sales Model
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Percentage of sales models usually assume that costs, fixed assets, and working capital all increase at the same rate as sales. When do you think that these assumptions do not make sense Would you feel happier using a percentage of sales model for short-term or long term planning?
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The solution explains the use of Percentage of Sales Model in short or long term planning
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The assumptions relating to fixed assets and costs would not make sense any time. The reason is
Costs - Some costs are fixed and some are variable. The fixed costs would not change with change in sales while the variable costs will increase. Thus the percentage of sales method would overstate the costs since it assumes that all costs will increase, while the fixed costs would not increase.
Fixed Assets - Fixed assets are lumpy and so would not ...
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