8 CONSUMER PURCHASING STRATEGIES AND LEGAL PROTECTION CHAPTER OVERVIEW While making consumer purchases may not be considered in most financial plans, these choices affect financial resources available for other purposes. This chapter starts with a discussion of the factors that influence buying habits. Selected purchasing strategies are then covered, including types of retail stores, brands, and comparison shopping methods. Next, a systematic approach to making purchase decisions is presented related to buying, leasing, and operating motor vehicles. The chapter concludes with a discussion of consumer protection actions and legal alternatives available to individuals. LEARNING OBJECTIVES CHAPTER SUMMARY After studying this chapter, students will be able to: LO 8-1 Identify strategies for effective consumer buying . Various economic, social, and personal factors influence daily buying decisions. Overspending and poor money management are frequent causes of overuse of credit and other financial difficulties. Timing purchases, comparing stores and brands, using label information, computing unit prices, and evaluating warranties are common strategies for effective purchasing. LO 8-2 Implement a process for making consumer purchases. A research-based approach to consumer buying involves: (1) preshopping activities, such as problem identification and information gathering; (2) evaluating alternatives; (3) determining the purchase price; and (4) postpurchase activities, such as proper operation and maintenance. LO 8-3 Identify steps to take to resolve consumer problems. Most consumer problems can be resolved by following these steps: (1) return to the place of purchase; (2) contact the company’s main office; (3) obtain assistance from a consumer agency; and (4) take legal action. LO 8-4 Evaluate the legal alternatives available to consumers. Small claims court, class action suits, and the services of a lawyer are legal means for handling consumer problems that cannot be resolved through communication with the business involved or through the help of a consumer protection agency. 8-1 INTRODUCTORY ACTIVITIES • Ask students to comment on their responses to the “My Life” chapter opening exercise (p. 267). • Point out the learning objectives (p. 267) in an effort to highlight the key points in the chapter. • Ask students to provide examples of purchasing decisions and buying decisions that could affect a person’s overall financial situation. • Point out the opportunity costs of consumer buying habits that could affect reaching other financial goals. • Discuss common causes of consumer problems and methods that could be used to resolve these situations. WHAT'S NEW TO THIS EDITION Topics, Features Benefits for the Teaching-Learning Environment New visual: Buying Influences and Wise Spending Strategies. Presents an overview of factors that influence buying and actions that may be taken for wise shopping decisions. New feature: Net present value of buying a hybrid car Provides a framework to assess various consumer purchases in terms of the time value of money. New example: Upside down Presents a numeric examples for a situation in which the balance of an auto loan exceeds the value of the vehicle. New visual: Resolving Consumer Complaints Offers detailed actions for obtaining assistance when facing a consumer problem situation. CHAPTER 8 OUTLINE I. Consumer Buying Activities A. Financial Implications of Consumer Decisions B. Practical Purchasing Strategies 1. Timing Purchases 2. Store Selection 3. Brand Comparison 4. Label Information 5. Price Comparison B. Warranties 1. Used-Car Warranties 2. New-Car Warranties 3. Service Contracts II. Making Major Consumer Purchases: Buying Motor Vehicles A. Phase 1: Preshopping Activities 1. Problem Identification 8-2 2. Information Gathering B. Phase 2: Evaluating Alternatives 1. Selecting Vehicle Options 2. Comparing Used Vehicles 3. Leasing a Motor Vehicle C. Phase 3: Determining Purchase Price 1. Used-Car Price Negotiation 2. Price Bargaining for New Cars 3. Comparing Financing Alternatives D. Phase 4: Postpurchase Activities 1. Automobile Operation Costs 2. Motor Vehicle Maintenance 3. Automobile Servicing Sources III. Resolving Consumer Complaints A. Step 1: Initial Communication B. Step 2: Communication with the Company C. Step 3: Consumer Agency Assistance D. Step 4: Legal Action IV. Legal Options for Consumers A. Small Claims Court B. Class-Action Suits C. Using a Lawyer D. Other Legal Alternatives E. Personal Consumer Protection 8-3 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions I. CONSUMER BUYING ACTIVITIES (p. 268) Financial Implications of Consumer Decisions (p. 268) • Your daily buying habits are affected by a wide variety of economic, social, and personal factors. • Opportunity costs of daily buying decisions are commonly overlooked trade-offs such as: higher costs when buying on credit buying poor quality items buying brands that are difficult to obtain repair service buying by mail to save time and money but having a difficult time returning the item using time and effort to comparison shop • Use PPT slides 8-2 to 8-5. • Text Highlight: Exhibit 8-1 presents the relationship between wise buying and financial security. Wise Purchasing Strategies (p. 269) • Various shopping techniques should be considered for various purchasing situations. Timing Purchases • Many people save by buying holiday items and other products at reduced prices in late December and early January, when retail sales are slow. • Bargains can be obtained by buying winter clothing in midwinter or late winter or by buying summer clothing in midsummer or late summer. Store Selection • Your decision to shop at a particular store is probably influenced by the variety of merchandise and quality of its brands. • Also important are the store’s policies with regard to such matters as check cashing, exchanges, and frequency of sales. Brand Comparison • Comparison shopping is the process of considering alternative stores, brands, and prices. In contrast, impulse buying is unplanned purchasing. While some impulse buying may be acceptable, too much can cause financial problems. • Brand name products are highly advertised items that are available in many stores. • Store brand products, sold by one chain of stores, are low-cost alternatives to famous name products. • Generic items, plain package, nonbrand items, provide a low-cost third choice. Label Information • Federal law requires that a label on all food products • Use PPT slides 8-6 to 8-9. • Assignment: Have students conduct a survey to determine the factors that influence store choice among consumers. • Text Highlight: The "Financial Planning Calculations " feature (pp. 270-271) provides two consumer buying analysis tools" net present value and a consumer buying matrix. 8-4 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions contain information on the common name of the product, the name and address of the manufacturer or distributor, the net weight, and ingredients listed in decreasing order of weight. • Product labeling for appliances includes information on operating costs that can assist you in selecting the most energy-efficient models. • Open dating tells consumers about the freshness or shelf life of a perishable product. Price Comparison • Unit Pricing uses a standard unit of measurement to compare the prices of packages of different sizes. • The process for calculating the unit price is as follows: Step 1. Determine the common unit of measurement, such as ounces, pounds, gallons, or number of sheets (for items such as paper towel or facial tissues). Step 2: Divide the price by the number of common units; for example, an 8-ounce package of breakfast cereal selling for $1.52 has a unit price of 19 cents per ounce, while an 11-ounce package costing $1.98 has a unit price of 18 cents per ounce. Step 3: Compare the unit price for various sizes, brands, and stores to determine the best buy for your situation. • Remember, the package with the lowest unit price may not be the best buy for you since it may contain more food than you would use before it spoiled. Warranties (p. 272) • A warranty is a written guarantee from the manufacturer or distributor of a product that specifies the conditions under which the product can be returned, replaced, or repaired. • An express warranty, usually in written form, is created by the seller or manufacturer and can be a full warranty or a limited warranty. • An implied warranty is the result of a product’s intended use or other suggested understandings that are not in writing. Used-Car Warranties (p. 272) • The Federal Trade Commission requires businesses that sell used cars to have a buyers’ guide sticker. This disclosure must state if the car comes with a warranty; if so, what is the specific protection. • While a used car may not have an express warranty, most states have implied warranties that protect the • Text Highlight: The example on page 272 provides an explanation of unit pricing. • Text Highlight: Exhibit 8-2 (p. 273) provides a summary of wise online buying activities. • Use PPT slide 8-10. 8-5 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions basic rights of a used car buyer. New-Car Warranties (p. 274) • New car warranties provide buyers with some assurance of quality. These warranties vary in time and mileage of the protection they offer and in the parts they cover. Service Contracts (p. 274) • A service contract is an agreement between a business and a consumer to cover the repair costs of a product. While sometimes called extended warranties, they are not warranties. • For a fee, they insure the buyer against losses due to the cost of certain repairs. Automotive service contracts can cover repairs not included in the manufacturer’s warranty. • Service contracts range from $400 to over $1,000; however, they do not always include everything you might expect. • Because of costs and exclusions, service contracts may not be a wise financial decision. • Text Highlight: The "Financial Planning for Life's Situations" feature (p. 275) discusses common consumer buying myths. • Practice Quiz 8-1 (p. 274) II. MAKING MAJOR CONSUMER PURCHASES: BUYING MOTOR VEHICLES (p. 275) • A specific decision-making process can help to make effective purchases. Phase 1: Preshopping Activities (p. 275) • Objective decision making must start with a planned course of action. Define your shopping problem in terms of a broad perspective. • Information is power. The better informed you are, the more likely you are to make the purchasing choice that best serves your interest. • The main sources of consumer information are: 1. personal contacts 2. business organizations including advertising, labels, and sales personnel 3. media information from television, radio, newspapers, and magazines 4. independent testing organizations such as Consumers Union and Underwriters Laboratories 5. government agencies 6. online sources Phase 2: Evaluation of Alternatives (p. 277) • Each alternative needs to be evaluated on the basis of • Use PPT slides 8-11, 8-12, 8- 18. • Discussion Question: How can consumers determine if information from advertising and other business sources is reliable? • Text Highlight: Exhibit 8-3 (p. 276) provides an overview of the phases involved in the research-based approach for consumer purchasing. • Current Example: Compulsive shoppers tend to have some of the following characteristics: run up credit card balances miss paying some bills make only minimum payment on charge accounts hide purchases from partner throw out clothes that have never been worn buy something every time a store is entered Some individuals may require professional help 8-6 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions such factors as personal values and goals, available time and money, the costs of each alternative, the benefits of each alternative, and your specific needs with regard to product size, quality, quantity, and features. • As you research various consumer purchases, you will need to identify the attributes important to you. • Research studies have shown that price variations can occur for all types of products. For a single-lens reflex camera, prices may range from under $200 to well over $500. The price of aspirin may range from less than 50 cents to over $3 for 100 five-grain tablets. • You can benefit from comparison shopping when buying expensive or complex items buying items you purchase often comparison can be done easily (using ads or catalogs) different sellers offer different prices and services product quality or prices vary greatly. Selecting Vehicle Options (p. 277) • Optional equipment can be grouped into three categories: (1) devices to improve performance and ease of operation, (2) comfort and convenience options, and (3) features that add to the vehicle’s visual appeal. Comparing Used Vehicles (p. 277) Common sources of used cars include: • New-car dealers offer late-model vehicles and may give you a warranty, which usually means higher prices than at other sources. • Used-car dealers usually have older vehicles. Warranties, if offered, will be limited. However, lower prices may be available. • Individuals selling their own cars can be a bargain if the vehicle was well maintained. Few consumer protection regulations apply to private-party sales. Caution is suggested. • Auctions and dealers sell automobiles previously owned by businesses, auto rental companies, and government agencies. • Used-car superstores, such as CarMax, offer a large inventory of previously owned vehicles. • Online used-car businesses, such as www.dealernet.com and www.americasautomall.com. • Certified, pre-owned (CPO) vehicles are nearly new cars that come with the original manufacturer’s guarantee of quality. The rigorous inspection and with this behavior disorder. • Exercise: Create a list of the most popular optional features for motor vehicles, and discuss their costs and benefits. • Use PPT slides 8-13. 8-7 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions repair process means a higher price than other used vehicles. Leasing a Motor Vehicle (p. 278) • Leasing is a contractual agreement with monthly payments for the use of an automobile over a set time period. • The main advantages of leasing include: (1) only a small cash outflow may be required for the security deposit; (2) monthly lease payments are usually lower than monthly financing payments; (3) the lease agreement provides detailed records for business purposes; and (4) you are usually able to obtain a more expensive vehicle, more often. • Major drawbacks of leasing include: (1) no ownership interest in the vehicle; (2) a need to meet requirements similar to qualifying for credit; (3) additional costs may be incurred for extra mileage, certain repairs, turning the car in early, or even a move to another state. • When leasing, you arrange for the dealer to sell the vehicle through a financing company. As a result, be sure you know the true cost, including o The capitalized cost, which is the price of the vehicle. o The money factor, which is the interest rate being paid on the capitalized cost. o The monthly payment and number of payments. o The residual value, or the expected value of the vehicle at the end of the lease. • After the final payment, you may to return, keep, or sell the vehicle. • Text Highlight: The "Financial Planning Calculations" feature (p. 279) provides a framework for comparing buying and leasing a motor vehicle. 8-8 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions Phase 3: Determining Purchase Price (p. 280) • Negotiation of price may be possible in a buying situation when: 1. you have all the necessary information about the product and buying situation. 2. you deal with a person who has the authority to give you a lower price or additional features, such as the owner or store manager. Used-Car Price Negotiation (p. 280) • You can begin to determine a fair price by checking newspaper ads for the prices of comparable vehicles. Several published sources also list current prices for used cars. • The basic price of a used car is also influenced by the number of miles and special features and options. Price Bargaining For New Cars (p. 280) • The sticker price, displayed in printed form on the vehicle, is the suggested retail price of a new car and optional equipment. • Information about the dealer’s cost may be obtained from several sources including books available at libraries and computerized data services. • Start your price bargaining by comparing prices of similar automobiles at several dealers. • Use dealer’s cost information in your effort to get a vehicle price that is only a couple of hundred dollars over the dealer’s cost. • Lowballing occurs when a new car buyer is quoted a very low price and add-on costs increase before the deal is concluded. • Highballing occurs when a new car buyer is offered a very high price for a trade-in vehicle, with the extra amount made by increasing the price of the new car. • Use PPT slides 8-14 and 8-15. 8-9 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions Comparing Financing Alternatives (p. 281) • Car loans are available from banks, credit unions, finance companies, and other financial institutions. • The annual percentage rate (APR) is the best indicator of the true cost of credit. Phase 4: Postpurchase Activities (p. 282) • Maintenance and ownership costs may be associated with the purchased item. • In some situations, you may not be satisfied with a purchase. A wide variety of grounds for complaint can occur. Automobile Operation Costs (p. 282) • Your driving costs will vary based on two main factors— the size of your automobile and the number of miles you drive. • The largest fixed expense associated with a new automobile is depreciation, the loss in the vehicle’s value due to time and use. • Another fixed ownership cost is the interest charge for financing an automobile purchase. • Other fixed costs associated with automobile ownership are insurance, license and registration fees, and taxes. Since fixed costs are fairly constant, they are easier to anticipate than variable costs. • Expenses related directly to the operation of a vehicle are gasoline, oil, tires, maintenance, repairs, and replacement parts. • An awareness of the total cost of owning and operating an automobile can be valuable for overall financial planning. • Use PPT slides 8-16 and 8-17. Motor Vehicle Maintenance (p. 282) • People who sell, repair, or drive automobiles for a living state that regular vehicle care is one of your best investments. • The systems of your car that should be monitored and maintained on a regular basis are the engine, cooling system, transmission, brakes, steering mechanism, exhaust components, and suspension. • Text Highlight: Exhibit 8-6 (p. 283) provides a list of proper motor vehicle maintenance. 8-10 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions Automobile Servicing Sources (p. 283) • The service department of a car dealer offers a wide range of car care activities; their charges are generally higher than other service locations. • Local gas stations often provide convenience and reasonable prices for most repairs; fewer full-service stations are available than in the past. • Independent repair shops serve a wide variety of servicing needs at competitive prices. • Mass merchandising retailers offer convenient, low-cost service, and usually emphasize the sale of tires, batteries, mufflers, and other replacement parts. • Specialty shops are limited-service businesses that offer a single product or maintenance effort at a reasonable price. • Many individuals avoid repair fraud problems and minimize costs by working on their own vehicles. • Use PPT slide 8-18. • Text Highlight: Exhibit 8-7 (p. 283) warns of common auto repair frauds. • Practice Quiz 8-2 (p. 284) 8-11 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions III. RESOLVING CONSUMER COMPLAINTS (p. 284) • Every business transaction is a potential problem. Most customer difficulties are the result of defective products, low quality, short product lives, unexpected costs, and poor repairs. • You will probably never be completely satisfied with every purchase you make. The process for resolving differences has four phases: 1. Initial communication 2. Communication with the company 3. Consumer agency assistance 4. Legal action. • Mediation is involvement of an impartial third party who tries to resolve a difference between a customer and a business through discussion and negotiation. • Arbitration is the settlement of a difference by a third party—the arbitrator—whose decision is legally binding. • Many state, local, and federal government agencies are available to assist consumers; see Appendix B. • Use PPT slides 8-19 and 8-20. • Text Highlight: Exhibit 8-8 (p. 288) provides an overview of the process for resolving consumer complaints. • Text Highlight: Exhibit 8-9 (p. 287) suggests a format for a complaint e-mail/letter when contacting a business or consumer agency. • Supplementary Resource: Have students access the Consumer Resource Handbook at http://publications.usa.gov/ • Supplementary Example: Federal law allows a person three business days to cancel a contract for $25 or more if the agreement was signed away from the seller’s regular place of business. This “cooling-off” law does not apply to purchases made at a retail business in a fixed location or for transactions made by mail or phone. The cancellation right also applies to home-equity loans, health club memberships, and discount buying clubs, no matter where the contract is signed. Many states have a cooling-off period when buying timeshare vacation property, while others also cover campground memberships. • Practice Quiz 8-3 (p. 288) 8-12 CHAPTER 8 LECTURE OUTLINE Instructional Suggestions IV. LEGAL OPTIONS FOR CONSUMERS (p. 288) • If all previously mentioned avenues of action fail to resolve a consumer complaint, legal action may be appropriate. Small Claims Court (p. 289) • In a small claims court, a person may file a claim for legal matters involving amounts under a set limit. • To make best use of small claims court, the following tips are suggested: Become familiar with the location, procedures, and filing fees (usually ranging from $5 to $50) Observe other cases to learn more about the process Present your case in a polite, calm, and concise manner Submit evidence such as photographs, contracts, receipts, and other documents Use witnesses who can testify on your behalf Class Action Suits (p. 289) • A class action suit is a legal action taken by a few individuals on behalf of all the people who have suffered the same alleged injustice. • Recent class action suits included auto owners who were sold unneeded replacement parts for their vehicles and a group of investors who sued a brokerage company for unauthorized buy and sell transactions resulting in high commission charges. Using a Lawyer (p. 289) • Deciding when to use a lawyer is difficult. In general, straightforward legal situations usually do not require legal counsel. But for more complicated matters, it is probably wise to obtain legal assistance. Other Legal Alternatives (p. 290) • A legal aid society is one of a network of publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney. • Prepaid legal services are programs that provide unlimited or reduced-fee legal assistance for a set fee. Personal Consumer Protection (p. 291) • Consumer protection devices are of no value unless a person is aware of them, and makes use of them when seeking information or resolving a problem. • Use PPT slide 8-21. • Supplementary Resource: Talk to a lawyer to obtain information about types of situations that require legal assistance. How can people avoid some of the legal problems they commonly encounter? • Text Highlight: The “How to…” feature on page 290 provides details on filing a suit in small claims court. • Discussion Question: What are the best methods for staying informed on current consumer problems? • Current Example: Complaint letters and store protests have given way to technology. Several hundred websites have been created by consumers wishing to let others know of their dissatisfaction with a company. • Text Reference: The “Financial Planning for Life’s Situations” feature on page 291 provides an opportunity to discuss various business practices in relation to potential legal violations. • Practice Quiz 8-4 (p. 292) 8-13 CONCLUDING ACTIVITIES • Point out the chapter summary (p. 293) and key terms in the text margin. • Use the “My Life Stage” feature (p. 292) to highlight the main financial planning activities from the chapter for various ages and life situations. • Discuss selected end-of-chapter Financial Planning Problems, Financial Planning Activities, and Life Situation Case. • Use Chapter Quiz in the Instructor’s Manual. WORKSHEETS FROM PERSONAL FINANCIAL PLANNER FOR USE WITH CHAPTER 8 Use the “Your Personal Financial Planner in Action” (pp. 296-297) activities to encourage students to plan and implement various personal financial decisions. Sheet 32 Unit Pricing Comparison Sheet 33 Major Consumer Purchase Comparison Sheet 34 Current and Future Transportation Needs Sheet 35 Used Car Purchase Comparison Sheet 36 Buying vs. Leasing an Automobile Sheet 37 Comparing Cash and Credit for Major Purchases Sheet 38 Automobile Ownership and Operation Costs Sheet 39 Legal Services Cost Comparison CHAPTER 8 QUIZ ANSWERS True-False Multiple Choice 1. F (p. 275) 6. C (p. 272) 2. T (p. 276) 7. A (p. 277) 3. T (p. 270) 8. D (p. 278) 4. T (p. 272) 9. A (p. 288) 5. F (p. 285) 10. C (p. 290) 8-14 Name ________________________________________ Date____________________________ CHAPTER 8 QUIZ TRUE-FALSE _____1. The first element in a purchasing decision is gathering information. _____2. Consumer information from business organizations includes advertising, product labels, and packaging. _____3. National name brand products usually cost more than store brands or generics. _____4. An express warranty is usually in a written form. _____5. Most consumer complaints are resolved with the use of a government agency or by taking legal action. MULTIPLE CHOICE _____6. A(n) __________ warranty covers most repairs of a product. a. limited b. implied c. full d. express _____7. The highest prices for used cars are usually at a a. new-car dealer. b. used-car dealer. c. private-party sale. d. public auto auction. _____8. When leasing a motor vehicle, the capitalized cost refers to the a. security deposit. b. residual value. c. interest rate. d. price of the vehicle. _____9. A legally binding decision by a third part is a. arbitration. b. mediation. c. a legal society. d. a pre-paid legal service. _____10. __________ are publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney. a. Small claims courts b. Class action suits c. Legal aid societies d. Legal clinics 8-15 SUPPLEMENTARY ACTIVITY Consumer Decision-Making Styles Inventory Your Consumer Choices This page contains statements on different interests and priorities consumers have. Please read each statement and circle the number indicating how much you agree or disagree with the statement as a description of you. Strongly Disagree Disagree In Between Agree Strongly Agree 1. Getting very good quality is very important to me 1 2 3 4 5 2. The well-known national brands are best for me 1 2 3 4 5 3. I usually have one or more outfits of the very newest style 1 2 3 4 5 4. Shopping is a pleasant activity to me 1 2 3 4 5 5. I buy as much as possible at “sale” prices 1 2 3 4 5 6. I should plan my shopping more carefully than I do 1 2 3 4 5 7. There are so many brands to choose from that often I feel confused 1 2 3 4 5 8. I have favorite brands I buy over and over 1 2 3 4 5 9. When it comes to purchasing products, I try to get the very best 1 2 3 4 5 10. The more expensive brands are usually my choices 1 2 3 4 5 11. I keep my wardrobe up-to-date with the changing fashions 1 2 3 4 5 12. Going shopping is one of the enjoyable activities of my life 1 2 3 4 5 13. The lower price products are usually my choice 1 2 3 4 5 14. I am impulsive when shopping 1 2 3 4 5 15. Sometimes it’s hard to choose which stores to shop 1 2 3 4 5 16. Once I find a product or brand I like, I stick with it 1 2 3 4 5 8-16 Scoring Summary Directions: Add your scores for items on Your Consumer Choices: Perfectionist Consumer = 1._____ + 9._____ = _____ Brand Conscious Consumer = 2._____ + 10._____ = _____ Fashion Conscious Consumer = 3._____ + 11._____ = _____ Recreational Shopping Conscious Consumer = 4._____ + 12._____ = _____ Price-Value Conscious Consumer = 5._____ + 13._____ = _____ Impulsive Consumer = 6._____ + 14._____ = _____ Confused by Overchoice Consumer = 7._____ + 15._____ = _____ Habitual-Brand Loyal Customer = 8._____ + 16._____ = _____ Scoring Interpretation Scores of 9-10 = You are HIGH on this consumer characteristic. Scores of 6-8 = You are MODERATE to AVERAGE on this consumer characteristic. Scores of 2-5 = You are LOW on this consumer characteristic. 8-17 ANSWERS TO PRACTICE QUIZZES, FINANCIAL PLANNING PROBLEMS, FINANCIAL PLANNING ACTIVITIES, FINANCIAL PLANNING CASE, AND CONTINUING CASE PRACTICE QUIZZES Practice Quiz 8-1 (p. 274) 1. What factors commonly influence a person’s daily buying choices? Buying decisions are most influenced by economic factors (inflation, taxes, interest rates, government regulations), personal factors (age, sex, income, family situation), and social factors (lifestyle, interests, hobbies, advertising). (Exhibit 8-1, p. 268) Different individuals tend to overlook different factors. An increased awareness of these factors can assist in making wiser and more satisfying consumer choices. 2. How are daily buying decisions related to overall financial planning? As shown in Exhibit 8-1 (p. 268), a person’s spending patterns can result in either financial difficulties or achievement of desired financial goals. 3. What types of brands are commonly available to consumers? Consumers have a choice of brand-name, store-brand, and generic products. (p. 270) 4. In what types of situations can comparing prices help in purchasing decisions? Comparing prices can be helpful when buying expensive or complex items, when competing brands are available, when different package sizes are available, and when product quality varies. (p. 272) 5. How does a service contract differ from a warranty? What rights do purchasers of products have even if there is no written warranty? A service contract is a paid agreement for repairs. A warranty is a feature offered by a manufacturer or distributor. Even if there is not a written warranty, certain implied warranties are present. For example, sale of an item implies that the store owns the product or an item must do what it is intended to do, at least for a while! (p. 272) Practice Quiz 8-2 (p. 284) 1. What are the major sources of consumer information? The major sources of consumer information are personal contacts, business organizations, media information, independent testing organizations, online sources, and government agencies. (p. 276) 2. What actions are appropriate when buying a used car? Identify sources of used vehicles, research and compare prices, condition of vehicle, and options. 3. When might leasing a motor vehicle be appropriate? 8-18 Leasing may be appropriate for business use or when a new vehicle is desired every few years. 4. What maintenance activities could increase the life of your vehicle? Frequent oil changes, regular tune-ups, and checking belts, hoses, and fluids regularly can minimize major repairs and maximize vehicle life. Practice Quiz 8-3 (p. 288) 1. What are common causes of consumer problems and complaints? Not being informed in advance of factors such as warranties, service availability, prices at various stores, or cost of installation can result in consumer complaints. Also, not asking questions and not obtaining details in writing are common causes of consumer problems. (p. 284) 2. How can most consumer complaints be solved? Most consumer complaints are solved by contacting the store or company office. (p. 285) 3. How does arbitration differ from mediation? Mediation is the involvement of a third party to suggest solutions in a dispute; arbitration is a legally binding decision by a third party made once the two parties in dispute agree to the process. (pp. 288) Practice Quiz 8-4 (p. 292) 1. In what types of situations would small claims court and class action suits be helpful? Small claims court is helpful for minor consumer problems that require legal action. Class action suits can provide legal assistance to a group with the same consumer complaint. (p. 289) 2. Describe some situations in which you might use the services of a lawyer. If a consumer situation is complicated or involves a large sum of money, the use of a lawyer may be appropriate. Situations might include a product injury case, settling an estate, purchase of real estate, adoption of a child, or a divorce. (p. 289) FINANCIAL PLANNING PROBLEMS (p. 293) 1. Calculating Future Value. You can purchase a service contract for all of your major appliances for $180 a year. If the appliances are expected to last for 10 years and you earn 5 percent on your savings, what would be the future value of the amount you will pay for the service contract? Solution: $180 12.578 (PVA 5%, 10 years) = $2,264.04 LO: 8-1 Topic: Calculating Future Value LOD: Medium Bloom’s tag: Application 8-19 2. Future Value of Wise Buying. If a person saves $63 a month by using coupons and doing comparison shopping, (a) what is the amount for a year? (b) What would be the future value of this annual amount over 10 years, assuming an interest rate of 4 percent? Solution: (a) $63 × 12 = $756; (b) $756 × 12.006 = $9,076.54 LO: 8-1 Topic: Future Value of Wise Buying. LOD: Medium Bloom’s tag: Application 3. Comparing Buying Alternatives. Tammy Monahan is considering the purchase of a home entertainment center. The product attributes she plans to consider and the weights she gives to them are as follows: Portability .1 Sound projection .6 Warranty .3 Tammy rated the brands as follows: portability sound projection warranty Brand A 6 8 7 Brand B 9 6 8 Brand C 5 9 6 Using the consumer buying matrix (p. 271), conduct a quantitative product evaluation rating for each brand. What other factors is Tammy likely to consider when making her purchase? Solution: Brand A: (.1 6) + (.6 8) + (.3 7) = 7.5 Brand B: (.1 9) + (.6 6) + (.3 8) = 6.9 Brand C: (.1 5) + (.6 9) + (.3 6) = 7.7 Tammy should also consider many other factors such as store location, availability of service, brand reputation, experience of others, and shipping costs. LO: 8-2 Topic: Comparing Buying Alternatives. LOD: Medium Bloom’s tag: Application, analysis 4. Calculating the Cost of Credit. John Walters is comparing the cost of credit to the cash price of an item. If John makes an $80 down payment and pays $34 a month for 24 months, how much more will that amount be than the cash price of $695? Solution: [($34 24 months) + $80] - $695 = $201 LO: 8-2 Topic: Calculating the Cost of Credit. LOD: Medium Bloom’s tag: Application 5. Computing Unit Prices. Calculate the unit price of each of the following items: 8-20 Solution: Motor oil 78 cents a quart Cereal 14.5 cents an ounce Canned fruit 6.8 cents an ounce Facial tissue 75 cents per 100 Shampoo 23.3 cents an ounce LO: 8-2 Topic: Computing Unit Prices. LOD: Easy Bloom’s tag: Application 6. Calculating the Present Value of a Consumer Purchase. What would be the net present value of a microwave oven that costs $159 and will save you $68 a year in time and food away from home? Assume an average return on your savings of 4 percent for five years. Solution: $68 4.452 (PV of a series of amounts, 4%, 5 years) - $159 = $143.74 LO: 8-2 Topic: Calculating the Present Value of a Consumer Purchase LOD: Medium Bloom’s tag: Application 7. Comparing Automobile Purchases. Based on financial and opportunity costs, which of the following do you believe would be the wiser purchase? Vehicle 1: A three-year-old car with 45,000 miles, costing $8,700, and requiring $585 of immediate repairs. Vehicle 2: A five-year-old car with 62,000 miles, costing $6,500, and requiring $960 of immediate repairs. Solution: Students can make a case for either vehicle since #1 has lower mileage, is newer, and requires fewer repairs. However, some people may find #2 more appealing due to the lower initial costs. LO: 8-2 Topic: Comparing Automobile Purchases LOD: Medium Bloom’s tag: Analysis 8-21 8. Calculating Motor Vehicle Operating Costs. Using Sheet 38 in the Personal Financial Planner, calculate the approximate yearly operating cost of the following vehicle. Annual depreciation $2,500 Annual mileage 13,200 Current year’s loan interest $650 Miles per gallon 24 Insurance $680 Average gasoline price $3.68 per gallon License and registration fees $65 Oil changes/repairs $370 Parking/tolls $420 Solution: Fixed Ownership Costs Variable Operating Costs $2,500 depreciation $2,024 Gasoline 650 interest on loan 370 oil/repairs 680 Insurance 420 parking/tolls 65 License/registration $2,814 total variable costs $3,895 total fixed costs Total costs $6,709 divided by 13,200 miles equals 50.8 cents cost per mile. LO: 8-2 Topic: Calculating Motor Vehicle Operating Costs LOD: Medium Bloom’s tag: Application 9. Buying versus Leasing a Motor Vehicle. Based on the following, calculate the costs of buying and of leasing a motor vehicle. Purchase Costs Leasing Costs Down payment $1,500 Security deposit $500 Loan payment $450 for 48 months Lease payment $450 for 36 months Estimated value at end of loan $4,000 End of lease charges $600 Opportunity cost interest rate: 4 percent Solution: Purchase: $1,500 + [450 × 48] – 4,000 + [1,500 × .04 × 4] = $19,340 Lease: [450 × 36] + 600 + [500 × .04 × 3] = $16,860 LO: 8-2 Topic: Buying vs. Leasing a Motor Vehicle. LOD: Medium Bloom’s tag: Application 8-22 FINANCIAL PLANNING ACTIVITIES (p. 295) 1. Analyzing Influences on Consumer Buying. Use advertisements, online articles, and personal observations to describe the economic, social, and personal factors influencing purchases of people in the following life situations: (a) a retired person; (b) a single parent with children ages 5 and 9; (c) a dual- income couple with no children; (d) a person with a dependent child and a dependent parent. Ask students to identify and explain differences in buying influences for different life situations. 2. Comparing Consumer Information Sources. Obtain online reviews to evaluate and compare different brands of a product. Also obtain information on the product from people who sell the item and those who have recently purchased it. Compare the information received from these sources. Product reviews and ratings can provide helpful insight into a purchase. However, these results can sometimes be different from those of individual consumers. Have students report on their findings of differences between what was found online and what other consumers experienced with the product. 3. Researching Consumer Purchases. Using the consumer buying matrix (p. 271), analyze a consumer purchase you plan to make sometime in the future. What factors affected the selection of the attributes and weights you chose for this purchase analysis? This assignment will require students to assess the importance of various attributes when making a major purchase. 4. Comparing Used Cars. Use Sheet 35 in the Personal Financial Planner to compare different sources of used motor vehicles. This activity can involve use of advertisements and an online search rather than visits to used car sales locations. Students should be able to point out economic, operational, and other factors that influence costs of vehicles from different sources. 5. Evaluating Motor Vehicle Leases. Use Sheet 36 in the Personal Financial Planner to compare the costs of buying and leasing a motor vehicle. This activity will allow students to better understand the sources and costs of leasing a motor vehicle. Encourage students to use dealer visits, advertisements, and websites to obtain information for this activity. 6. Identifying and Solving Consumer Problems. Conduct online research to determine the most common sources of consumer complaints. Interview someone who has had a consumer complaint. What was the basis of the complaint? What actions did the person take? Was the complaint resolved in a satisfactory manner? Have students report their findings in a brief presentation or video dramatization. 7. Comparing Legal Services. Prepare a survey of legal services available to students and others in your community. Use Sheet 39 in the Personal Financial Planner to compare the fees and services provided by lawyers and other sources of legal assistance. 8-23 Some colleges have legal services available for students, this alternative should be considered along with others. FINANCIAL PLANNING CASE Online Car Buying (p. 295) 1. Based on Mackenzie’s experiences, what benefits and drawbacks are associated with online car buying? While ease and convenience may be associated with online car buying, uncertainty of vehicle performance and dealer reputation may be a concern. 2. What additional actions might Mackenzie consider before buying a motor vehicle? Talk to people who have purchased vehicles through various online sources; research local dealers who actively participate in the online buying process. 3. What do you consider to be the benefits and drawbacks of shopping online for motor vehicles and other items? While student answers will vary, encourage students to communicate their knowledge related to online shopping. CONTINUING CASE Making Purchasing Decisions (p. 297) Questions 1. What strategies should they use to research and purchase a used car and other high dollar items such as furniture? Although student responses may vary, some good answers to this question are: • They should identify their needs and gather relevant product information. • They should then compare product features such as the vehicle options. • They should then compare various sources of the product such as new-car dealers, used-car dealers, individuals selling their own cars, auctions, used-car superstores, or online used-car businesses. • Then they should determine a fair purchase price by reviewing various sources such as newspaper ads, Kelley Blue Book, and Edmund’s Used Car Prices. • Then they should negotiate to obtain a lower price. • Lastly, they should determine if paying cash is appropriate or if financing is appropriate. Various sources of financing are available to choose from such as loans from banks, credit unions, consumer finance companies, and other financial institutions. 2. What items should Shelby and Mark consider a part of the real cost of owning a car? Although student responses may vary, some good answers to this question are: 8-24 • Depreciation • Insurance • Interest on the auto loan • License and registration fees • Taxes and other fees • Oil, tires, and other maintenance or repair costs • Gasoline • Parking and toll fees 3. Explain how Shelby and Mark might use the following Personal Financial Planner sheets (Used- Car Purchase Comparison and Buying versus Leasing an Automobile). Although student responses may vary, some good answers to this question are: a. Used-Car Purchase Comparison They can use this form to compare the condition of used vehicles they are considering from various sources. b. Buying versus Leasing an Automobile They can use this form to compare the total cost of leasing a car to the total cost of purchasing a car. DAILY SPENDING DIARY (p. 297) This activity can assist students with an ability to reduce unplanned buying and to better achieve long- term financial goals. 8-25 Name ______________________________________ Cha pt er 8: Consum er Pur cha sing St r a t egies a nd Lega l Pr ot ect ion 4. A nonprofit organization whose member-owners may save money on certain products or services. 7. A court that settles legal differences involving amounts below a set limit and employs a process in which the litigants usually do not use a lawyer. 10. One of a network of publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney. 11. Information about freshness or shelf life found on the package of a perishable product. 12. The use of a standard unit of measurement to compare the prices of packages of different sizes. 1. A legal action taken by a few individuals on behalf of all the people who have suffered the same alleged injustice. 2. A partial refund of the price of a product. 3. An agreement between a business and a consumer to cover the repair costs of a product. 5. The settlement of a difference by a third party whose decision is legally binding. 6. Unplanned purchasing. 8. The attempt by an impartial third party to resolve a difference between two parties through discussion and negotiation. 9. A written guarantee from the manufacturer or distributor of a product that specifies the conditions under which the product can be returned, replaced, or repaired. Across Down S E R V I C E C O N T R A C T L E G A L A I D S O C I E T Y C L A S S A C T I O N S U I T I S M A L L C L A I M S C O U R T M P U L S E B U Y I N G U N I T P R I C I N G C O O P E R A T I V E A R B I T R A T I O O P E N D A T I NN G M E D I A T I O N W A R R A N T Y R E B A T E 1 2 3 4 5 6 7 8 9 10 11 12 Instructor Manual for Personal Finance Jack R. Kapoor, Les R. Dlabay , Robert J. Hughes, Melissa M. Hart 9780077861643, 9781260013993
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