Assumptions Underlying Percentage of Sales Method
The fundamental supposition underlying the use of % of sales method is such, there is no inflation in the economy such is the increase in sales is caused via increase in production and not increase in selling price.
Other assumptions contains as:
1. The firm is operating on full or 100% capacity. Hence the increase in production will need acquisition of new fixed assets.
2. The firm wills not questioning new ordinary shares or preference or debenture shares so this capital will keep constant during the forecasting duration.
3. The relationship between balance sheet item and sales that is balance sheet items like % of sales will be kept during forecasting duration.
4. The after tax, net profit margin or profit on sale will be got and shall remain constant in the forecasting duration.