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CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling

An analyst forecasts a manufacturer's cost of goods sold as a fixed percentage of sales, based on the last three years. Which assumption is the analyst most likely making?

The analyst is most likely assuming that gross margin stays roughly constant because cost of goods sold varies in proportion to sales. A fixed percentage implies no operating leverage in that line and no change in input prices relative to selling prices.

  1. AGross margin will stay roughly constant, with costs varying in proportion to salesCorrect
  2. BFixed costs will dominate, creating strong operating leverage
  3. CInput prices will fall as sales rise

Explanation

Setting COGS at a constant percentage of sales implies a stable gross margin and costs that vary proportionally with sales. Operating leverage would require a fixed-cost component, and falling input prices would lower the percentage.

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