Explain Why Some Companies Carry Their Inventories at NRV Minus

question 150

Essay

Explain why some companies carry their inventories at NRV minus an estimated operating income margin instead of the NRV itself.

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Definitions:

Escalating Cost Impact

The effect of costs increasing over time, often spiraling beyond original estimates, generally due to poor planning, scope creep, or unforeseen circumstances.

Satisficing

A decision-making strategy that involves searching for and choosing an acceptable or satisfactory response to a problem or scenario, rather than an optimal solution.

Anchoring and Adjustment Heuristic

A cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions.

Representativeness Heuristic

A mental shortcut people use where the likelihood of an object belonging to a particular category is assessed based on how typical that object is thought to be of the category.