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

When forecasting selling, general and administrative expenses for a company with a large fixed component, which approach is most likely to produce the most accurate forecast in a year of rapid sales growth?

The most accurate approach models the fixed portion as a stable amount and the variable portion as a percentage of sales. This reflects operating leverage when sales grow quickly. A constant percentage overstates expenses, while holding total SG&A flat ignores its variable component.

  1. AModel the fixed portion as a stable amount and the variable portion as a percentage of salesCorrect
  2. BApply the prior-year SG&A percentage of sales to the new revenue
  3. CHold total SG&A flat in line with last year

Explanation

Separating fixed and variable costs captures operating leverage: SG&A as a share of sales falls as sales grow. A constant percentage overstates costs, and flat total SG&A ignores the variable part.

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