Question

A purchasing agent has two potential firms from which to buy materials for production. If both firms charge the same price, the material cost is?

1) an irrelevant cost.
2) a sunk cost.
3) an opportunity cost.
4) a relevant cost.

Answer 1

The material cost from two potential firms charging the same price is an irrelevant cost because it does not affect the decision-making process as the cost is the same in either case.

Step-by-step explanation:

In assessing costs for economic decision-making, a purchasing agent must identify whether each cost is relevant to the decision at hand. When two potential firms charge the same price for materials, this material cost becomes an irrelevant cost because the cost would be the same regardless of which firm is chosen, and therefore, it does not impact the decision-making process.

Sunk costs are past costs that cannot be recovered and should not be considered in current decision-making. Opportunity costs represent the benefits a firm foregoes by choosing one alternative over another. In the scenario where the cost is the same from both suppliers, there is no opportunity cost involved because the cost is not a factor influencing the decision between the two firms. Therefore, the correct answer is that the material cost in this case is an irrelevant cost (option 1).