Under what circumstances does a firm violate the basic relationship underlying the percent of sales forecast
method?
What will be an ideal response?
The percent of sales method of financial forecasting provides reasonable estimates of a firm's financing requirements
only when asset requirements and financing sources can be accurately forecast as a constant percent of sales. There are
some fairly common instances in which this type of relationship fails to describe the relationship between an asset
category and sales. Two such examples involve assets for which there are scale economies and assets that must be
purchased in discrete quantities ("lumpy assets"). Economies of scale are sometimes realized from investing in certain
types of assets. These assets do not increase in direct proportion to sales. A lumpy asset, is an asset that must be
purchased in large, nondivisible components.
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