Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

Focus on Personal Finance 5th Edition

by Kapoor Dlabay Hughes Hart ISBN
0077861744 9780077861742
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CHAPTER 6
CONSUMER PURCHASING STRATEGIES AND WISE
BUYING OF MOTOR VEHICLES
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 various purchasing
strategies. Next, a systematic approach to buying a motor vehicle or other major purchase decisions is
presented. 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:

Obj. 1 Identify strategies for Timing purchases, comparing stores and brands, using label
effective consumer information, computing unit prices, and evaluating warranties are
buying. common strategies for effective purchasing.

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Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

Obj. 2 Implement a process for A research-based approach to consumer buying involves: (1) pre-
making consumer shopping activities, such as problem identification and information
purchases. gathering; (2) evaluating alternatives; (3) determining the purchase
price; and (4) postpurchase activities, such as proper operation and
maintenance.

Obj. 3 Describe steps to take to Most consumer problems can be resolved by following these steps:
resolve consumer (1) Return to the place of purchase; (2) contact the company’s main
problems. office; (3) obtain assistance from a consumer agency; and (4) take
legal action.

Obj. 4 Evaluate legal Small claims court, class-action suits, the services of a lawyer, legal
alternatives available to aid societies, and prepaid legal services are legal means for handling
consumers. consumer problems that cannot be resolved through communication
with the company involved or with help from a consumer protection
agency.

INTRODUCTORY ACTIVITIES
• Ask students to comment on the “3 Steps to Financial Literacy" feature at the start of the chapter (p.
188).
• Point out the learning objectives (p. 189) in an effort to highlight the key points in the chapter.
• Provide an overview and the “Your Personal Financial Plan Sheets” for this chapter (p. 189)

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Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

• 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.

CHAPTER 6 OUTLINE

I. Consumer Buying Activities

A. Practical Purchasing Strategies
1. Timing Purchases
2. Purchase Location
3. Brand Comparison
4. Label Information
5. Price Comparison
B. Warranties
1. Used-Car Warranties
2. New-Car Warranties
3. Service Contracts
C. Research-Based Buying
II. Major Consumer Purchases: Buying Motor Vehicles
A. Phase 1: Preshopping Activities
1. Problem Identification
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

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B. Step 2: Communicate 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

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CHAPTER 6 LECTURE OUTLINE Instructional Suggestions

I. CONSUMER BUYING ACTIVITIES (p. 189) • Use PPT slides 6-1 to 6-6.

• Your daily buying habits are affected by a wide

variety of economic, social, and personal factors.

Practical Purchasing Strategies (p. 189)

• Comparison shopping is the process of considering
alternative stores, brands, and prices. In contrast,
impulse buying is unplanned purchasing. While some • Assignment: Have students
impulse buying may be acceptable, too much can conduct a survey to determine
the factors that influence store
cause financial problems. Six shopping techniques choice and place of purchase
should be considered for various purchasing among consumers.
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.
Purchase Location
• 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
• 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 • Text Highlight: Exhibit 6-1 (p.
• Federal law requires that a label on all food products 191) provides a summary of
suggested activities for wise
contain information on the common name of the
online buying.
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.

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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:
1. Determine common measurement unit (ounces,
pounds, gallons, or number of sheets.
2. Divide price by the number of common units;
for example, an 8-ounce package of cereal for
$1.52 has a unit price of 19 cents per ounce; 11-
ounces for $1.98 has a unit price of 18 cents.
3. Compare unit price for various sizes, brands,
and stores to determine the best buy.
• 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. 191)
• A warranty is a written guarantee from the • Use PPT slides 6-7 and 6-8.
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. 192)
• 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
basic rights of a used car buyer.
New-Car Warranties (p. 192)
• New car warranties provide buyers with some
assurance of quality. These warranties vary in time • Text Highlight: “From the
and mileage of the protection they offer and in the Pages of Kiplinger’s Personal
parts they cover. Finance” (p. 194).
Service Contracts (p. 192)
• A service contract is an agreement between a
business and a consumer to cover the repair costs of a
product. Also extended warranties, not are not
warranties. For a fee, they insure the buyer against • Practice Quiz 6-1 (p. 193)
losses due to the cost of certain repairs.
• Text Reference: “Apply
Yourself” activity (p. 193).

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CHAPTER 6 LECTURE OUTLINE Instructional Suggestions

II. MAJOR CONSUMER PURCHASES: BUYING • Use PPT slides 6-9 to 6-12.
MOTOR VEHICLES (p. 195) • Discussion Question: How can
consumers determine if
• A specific decision-making process can help to make information from advertising
effective purchases. and other business sources is
reliable?
Phase 1: Preshopping Activities (p. 195)
• Additional Example:
• Objective decision making must start with a planned Compulsive shoppers tend to
course of action. Define your shopping problem in have some of the following
terms of a broad perspective. characteristics:
• Information is power. The better informed you are, the  run up credit card balances
more likely you are to make the purchasing choice  miss paying some bills
that best serves your interest.  make only minimum
• The main sources of consumer information are: payment on charge
accounts
1. personal contacts
2. business organizations including advertising,  hide purchases from partner
labels, and sales personnel  throw out clothes that have
never been worn
3. media information from television, radio,
newspapers, and magazines  buy something every time a
store is entered
4. independent testing organizations such as
Consumers Union and Underwriters Laboratories  Some individuals may
require professional help
5. government agencies with this behavior disorder.
6. online sources
Phase 2: Evaluating Alternatives (p. 196)
• Use PPT slides 6-13 to 6-15.
• Each alternative needs to be evaluated on the basis of
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.

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CHAPTER 6 LECTURE OUTLINE Instructional Suggestions

Selecting Vehicle Options (p. 196) • Use PPT slide 6-16.
• Optional equipment can be grouped into three
categories: (1) devices to improve performance and
ease of operation, (2) comfort and convenience • Exercise: Create a list of the
options, and (3) features that add to the vehicle’s most popular optional features
for motor vehicles, and discuss
visual appeal. their costs and benefits.

Comparing Used Vehicles (p. 196) • Use PPT slide 6-17 and 6-18.
Common sources of used cars include: • Text Highlight: The "Figure It
• New-car dealers offer late-model vehicles and may Out" feature (p. 197) explains
give you a warranty, which usually means higher the use of net present value
(NPV) for evaluating a
prices than at other sources. consumer purchase.
• 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 include
www.dealernet.com and www.autotrader.com.
• Certified, pre-owned (CPO) vehicles are nearly new
cars that come with the original manufacturer’s
guarantee of quality. The rigorous inspection and
repair process means a higher price than other used
vehicles.

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CHAPTER 6 LECTURE OUTLINE Instructional Suggestions

Leasing a Motor Vehicle (p. 197) • Use PPT slides 6-19 and 6-20.
• 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.
Phase 3: Determining Purchase Price (p. 198) • Use PPT slides 6-21 to 6-24.

• 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.

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CHAPTER 6 LECTURE OUTLINE Instructional Suggestions

Used-Car Price Negotiation (p. 199)
• 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. 199)

• 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.

Comparing Financing Alternatives (p. 200)

• Car loans are available from banks, credit unions, • Use PPT slide 6-25.
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. 201)
• Use PPT slides 6-25 to 6-31.
• 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.

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CHAPTER 6 LECTURE OUTLINE Instructional Suggestions

Automobile Operation Costs (p. 201)
• 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.

Motor Vehicle Maintenance (p. 201)

• 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.

Automobile Servicing Sources (p. 201)

• 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 • Practice Quiz 6-2 (pp. 202-203)
offer a single product or maintenance effort at a
• Text Reference: “Apply
reasonable price. Yourself” activity (p. 203).
• Many individuals avoid repair fraud problems and
minimize costs by working on their own vehicles.

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Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

CHAPTER 6 LECTURE OUTLINE Instructional Suggestions

• Use PPT slides 6-32 and 6-33.
III. RESOLVING CONSUMER COMPLAINTS (p. • Text Highlight: Exhibit 6-7 (p.
203) 204) suggests a format for a
complaint e-mail when
• Every business transaction is a potential problem. contacting a business or
Most customer difficulties are the result of defective consumer agency.
products, low quality, short product lives, unexpected • Supplementary Resource:
costs, and poor repairs. Have students access the
Consumer Action Handbook at
• www.publications.usa.gov
• You will probably never be completely satisfied with
every purchase you make. The process for resolving • Supplementary Example:
differences has four phases: Federal law allows a person
three business days to cancel a
1. Initial communication contract for $25 or more if the
2. Communicate with the company agreement was signed away
3. Consumer agency assistance from the seller’s regular place of
4. Legal action. business. This “cooling-off” law
does not apply to purchases
made at a retail business in a
• Mediation is involvement of an impartial third party fixed location or for transactions
who tries to resolve a difference between a customer made by mail or phone. The
and a business through discussion and negotiation. cancellation right also applies to
home-equity loans, health club
memberships, and discount
• Arbitration is the settlement of a difference by a third buying clubs, no matter where
party—the arbitrator—whose decision is legally the contract is signed. Many
binding. states have a cooling-off period
when buying timeshare vacation
property, while others also cover
• Many state, local, and federal government agencies campground memberships.
are available to assist consumers; see Appendix C. • Practice Quiz 6-3 (pp. 205)
• Text Reference: “Apply
Yourself” activity (p. 205).
• Use PPT slide 6-34.
IV. LEGAL OPTIONS FOR CONSUMERS (p. 205) • Supplementary Resource: Talk
to a lawyer to obtain information
• If all previously mentioned avenues of action fail to about types of situations that
resolve a consumer complaint, legal action may be require legal assistance. How
appropriate. can people avoid some of the
legal problems they commonly
encounter?
• Small Claims Court (p. 205) • Discussion Question: What are
the best methods for staying
• In a small claims court, a person may file a claim for informed on current consumer
legal matters involving amounts under a set limit. problems?
• To make best use of small claims court, the following • Additional Example:
tips are suggested: Complaint letters and store
 Become familiar with the location, procedures, protests have given way to
technology. Many websites exist
and filing fees (usually ranging from $5 to $50) to let others know of
 Observe other cases to learn more about the dissatisfaction with a company.
process • Text Highlight: The Personal
 Present your case in a polite, calm, and concise Finance in Practice feature (p,
207) provides detailed steps for
manner filing a suit in small claims
 Submit evidence such as photographs, contracts, court.
receipts, and other documents
 Use witnesses who can testify on your behalf

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CHAPTER 6 LECTURE OUTLINE Instructional Suggestions

Class Action Suits (p. 206)

• 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. 206)
• 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. 206) • Text Reference: The “Personal
Finance in Practice” feature on
• A legal aid society is one of a network of publicly page 207 provides details on
supported community law offices that provide legal filing a case in small claims
assistance to consumers who cannot afford their own court.
attorney.
• Prepaid legal services are programs that provide
unlimited or reduced-fee legal assistance for a set fee.

• Use PPT slides 6-35 to 6-39.

Personal Consumer Protection (p. 206)
• Many laws, agencies, legal tools, and online sources
are available to protect your rights, but none will be of
value unless you use them. Consumer protection
experts suggest that to prevent being taken by
deceptive business practices, you should
1. Do business only with reputable companies with a
record of satisfying customers.
2. Avoid signing contracts and other documents you
do not understand.
3. Be cautious about offerings that seem too good to
be true—they probably are!
4. Compare the cost of buying on credit with the cost
of paying cash; also, compare the interest rates the
seller offers with those offered by a bank or a credit
union.
5. Avoid rushing to get a good deal; successful con • Practice Quiz 6-4 (p. 207)
artists depend on impulse buying. • Text Reference: “Apply
Yourself” activity (p. 207).

CONCLUDING ACTIVITIES

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Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

• Discuss “Your Personal Finance Dashboard" and possible financial planning actions (p. 208).

• Point out the chapter summary (p. 208) and key terms in the text margin.
• Assign and discuss selected end-of-chapter Problems and Questions, Case in Point, and Continuing
Case.
• Discuss “Your Personal Financial Plan” worksheets.
• Use the Chapter Quiz in the Instructor’s Manual.

WORKSHEETS FROM PERSONAL FINANCIAL PLANNER FOR USE WITH

CHAPTER 6

Sheet 18 Consumer Purchase Comparison

Sheet 19 Used Car Purchase Comparison
Sheet 20 Buying vs. Leasing an Automobile
Sheet 21 Legal Services Cost Comparison

CHAPTER 6 QUIZ ANSWERS

True-False Multiple Choice

1. F (p. 195) 6. C (p. 192)
2. F (p. 195) 7. A (p. 196)
3. T (p. 190) 8. D (p. 198)
4. T (p. 191) 9. A (p. 205)
5. F (p. 203) 10. C (p. 206)

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Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

Name ________________________________________ Date____________________________

CHAPTER 6 QUIZ

TRUE-FALSE
_____1. A purchasing decision starts with gathering information.
_____2. Consumer information from business organizations is usually the most
objective type of data available to help in a buying decision.
_____3. National name products usually cost more than store brands or private label
items.
_____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 court
b. Class action suits
c. Legal aid societies
d. Legal clinics

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Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

SUPPLEMENTARY ACTIVITY 1

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.

Disagree

Disagree

Between
Strongly

Strongly
Agree

Agree
In
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

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Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

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.

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Chapter 06 - Consumer Purchasing Strategies and Wise Buying of Motor Vehicles

SUPPLEMENTARY ACTIVITY 2

IS IT LEGAL?

The following situations are common problems for consumers. How would you respond to the
question at the end of each situation, yes or no?

1. A store advertised a bottle of shampoo as “the $1.79 size, on sale for 99¢” If the store
never sold the item for $1.79 but the manufacturer’s recommended price was $1.79,
was this a legitimate price comparison?

2. You purchase a stereo system for $650. Two days later, the same store offers the same item
for $425. Is this legal?

3. You receive an unordered sample of flower seeds in the mail. You decide to plant them to see
how well they will grow in your yard. A couple of days later, you receive a bill for the seeds. Do
you have to pay for the seeds?

4. A store has a “going out of business sale—everything must go” sign in its window.
After six months, the sign is still there. Is this a deceptive business practice?

5. A 16-year-old injured while playing ball at a local park is taken to a hospital for medical care.
The parents refuse to pay the hospital since they didn’t request the service. Can the parents be
held legally responsible for the charges?

6. You purchase a shirt for a friend. The shirt doesn’t fit, but when you return it to the
store, you are offered an exchange since the store policy is no cash refunds. Is this legal?

7. A manufacturer refuses to repair a motorcycle that is still under warranty. The manufacturer
can prove that the motorcycle was used improperly. If this is true, must the manufacturer honor
the warranty?

8. An employee of a store incorrectly marks the price of an item at a lower amount. Is the store
obligated to sell the item at the lower price?

Answers: Circumstances, interpretations of the law, and store policies, as well as state and local
laws, can affect the above situations. The generally accepted answers are no for 1, 3, 7, and 8;
yes for 2, 4, 5, and 6.

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ANSWERS TO PRACTICE QUIZZES, PROBLEMS,

QUESTIONS, AND CASES

PRACTICE QUIZZES

Practice Quiz 6-1 (p. 193)

[1] What types of brands are commonly available to consumers?

Consumers have a choice of brand-name, store-brand, and private-label products.

[2] In what 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.

[3] How does a service contract differ from a warranty?

A service contract is a paid agreement for repairs. A warranty is a feature offered by a manufacturer
or distributor.

[4] Match the following descriptions with the warranties listed here. Write your answer in the space
provided.
(a) express warranty: covers only aspects of the item purchased
(b) service contact: commonly referred to as an extended warranty
(c) limited warranty: usually in a written form
(d) implied warranty: covers a product’s intended use; may not be in writing
(e) full warranty: covers fixing or replacement of a product for a set time period

Practice Quiz 6-2 (pp. 202-203)

[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

[2] What actions are appropriate when buying a used car?

Identify sources of used vehicles, research and compare prices, determine the condition of vehicle,
and decide which options are desired.

[3] When might leasing a motor vehicle be appropriate?

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.

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[5] The following abbreviations appeared in an ad for selling used cars. Interpret these abbreviations.
AC air conditioning pwr mrrs power mirrors
ABS anti-lock braking system P/S power steering

Practice Quiz 6-3 (p. 205)

[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.

[2] How can most consumer complaints be resolved?

Most consumer complaints are solved by contacting the store or company office.

[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.

Practice Quiz 6-4 (p. 207)

[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.

[2] Describe 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.

[3] For the following situations, identify the legal action that would be most appropriate to take.

(a) LEGAL AID SOCIETY: A low-income person wants to obtain the services of a lawyer to file a
product-liability suit.

(b) SMALL CLAIMS COURT: A person is attempting to obtain a $150 deposit for catering that
was never returned.

(c) ARBITRATION: A consumer wants to settle a dispute out of court with the use of a legally-
binding third party.

(d) CLASS ACTION SUIT: A group of telephone customers were overcharged by $1.10 a month
over the past 22 months.
DISCUSSION QUESTIONS (p. 209)

1. Describe how advertisements, news articles, online sources, and personal observations might be used to
make wiser buying decisions.

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Student answers will vary based on information collected. Encourage students to explain actions that
result in wise buying habits.

2. When using the research-based approach for purchasing described in this chapter, which actions do you
believe are overlooked by most shoppers?

Student answers may include not clearly defining the problem, not seeking information from several
sources, not comparison shopping, not identifying several alternatives, and not carefully analyzing the
alternatives.

3. What are potential concerns associated with obtaining furniture, appliances, and other items from a
rent-to-own business?

These businesses typically charge very high prices when buying the item over time with “easy, low”
payments.

4. What is a “certified preowned” vehicle? What are the benefits and drawbacks of this type of purchase?

These reconditioned vehicles receive extensive servicing that brings their quality above the typical used
car. While these are more expensive, the assurance of quality is a benefit.

5. While fraud usually involves deceptions against consumers, what are some “frauds” that consumers
commit against business?

Student answers may include returning purchases as new after using the item or wearing the clothing,
using expired coupons, eating food items in stores without paying for the item, buying an item in one
store at a low price and returning at another store for a higher price, shoplifting.

PROBLEMS (p. 209)

1. An online buying club offers a membership for $300, for which you will receive a 10 percent discount
on all brand-name items you purchase. How much would you have to buy to cover the cost of the
membership? (LO 6.1)

3,000 = $300/0.10

2. John Walters is comparing the cost of credit to the cash price of an item. If John makes an $80 down
payment and pays $35 a month for 24 months, how much more will that amount be than the cash price of
$685? (LO 6.1)

[($35  24 months) + $80] - $685 = $235

3. Calculate the unit price of each of the following items: (LO 6.1)
a. Motor oil—2.5 quarts for $1.95 (cents/quart)
b. Cereal—15 ounces for $2.17 (cents/ounce)
c. Canned fruit—13 ounces for 89 cents (cents/ounce)
d. Facial tissue—300 tissues for $2.25 (cents/100 tissues)

Motor oil 78 cents a quart

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Cereal 14.5 cents an ounce

Canned fruit 6.8 cents an ounce
Facial tissue 75 cents per 100 tissues

4. A service contract for a video projection system costs $70 a year. You expect to use the system for five
years. Instead of buying the service contract, what would be the future value of these annual amounts
after five years if you earn 3 percent on your savings? (LO 6.1)

$70  5.309 (FVA 3%, 5 years) = $371.63

5. A work-at-home opportunity is available in which you will receive 3 percent of the sales for customers
you refer to the company. The cost of your “franchise fee” is $600. How much would your customers
have to buy to cover the cost of this fee? (LO 6.1)

$20,000 = $600/0.03

6. 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.
(Hint: Calculate the present value of the annual savings, then subtract the cost of the microwave.) (LO
6.1)

$68  4.452 (PV of a series of amounts, 4%, 5 years) - $159 = $143.74

7. If a person saves $62 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? (LO 6.1)

(a) $62 × 12 = $744; (b) $744 × 12.006 = $8,932.46

8. Based on financial and opportunity costs, which of the following do you believe would be the wiser
purchase? (LO 6.2)

Vehicle 1: A three-year-old car with 45,000 miles, costing $16,700 and requiring $1,385 of immediate
repairs.

Vehicle 2: A five-year-old car with 62,000 miles, costing $14,500 and requiring $1,760 of immediate
repairs.

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.

9. Based on the following data, prepare a financial comparison of buying and leasing a motor vehicle with
a $24,000 cash price:

Down payment (to finance vehicle), $4,000 Down payment for lease, $1,200
Monthly loan payment, $560 Monthly lease payment, $440

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Length of loan, 48 months Length of lease, 48 months

Value of vehicle at end of loan, $7,200 End-of-lease charges, $600

Buy: $4,000 + ($560 x 48) - $7,200 = $23,680

Lease: $1,200 + ($440 x 48) + $600 = $22,920

What other factors should a person consider when choosing between buying or leasing? (LO 6.2)

Students should point out the value of the owned vehicle when buying as well as the benefit of obtaining
a new vehicle every few years when leasing.

10. Based on the data provided here, calculate the items requested: (LO 6.2)

Annual depreciation, $2,500 Annual mileage, 13,200

Current year’s loan interest, $650 Miles per gallon, 24
Insurance, $680 License and registration fees, $65
Average gasoline price, $3.50 per gallon Oil changes/repairs, $370
Parking/tolls, $420

a. The total annual operating cost of the motor vehicle.

b. The operating cost per mile.

a. the total annual operating cost of the motor vehicle.

Fixed Ownership Costs Variable Operating Costs
Depreciation $2,500 Gasoline 1925
interest on loan 650 oil/repairs 370
Insurance 680 parking/tolls 420
License/registration 65
total fixed costs $3,895 total variable costs $2,715

b. the operating cost per mile.

Total costs $6,610 divided by 13,200 miles equals 50.1 cents cost per mile.

11. Based on the following, calculate the costs of buying versus leasing a motor vehicle. (LO 6.2)

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
Purchase: $1,500 + [450 × 48] – 4,000 + [1,500 × .04 × 4] = $19,340
Lease: [450 × 36] + 600 + [500 × .04 × 3] = $16,860

12. A class-action suit against a utility company resulted in a settlement of $1.4 million for 62,000
customers. If the legal fees, which must be paid from the settlement, are $300,000, what amount will each
plaintiff receive? (LO 6.4)

$17.74 = ($1,400,000 - $300,000) ÷ 62,000

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CASE IN POINT (p. 210)

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.

4. What actions might a car buyer take if a lemon is purchased?

A "lemon" refers to a motor vehicle, often new, that is highly flawed with numerous, severe
mechanical issues. Each state has a lemon law to guide consumers with a vehicle that has extensive
flaws. Additional information is available at: www.lemonlawamerica.com and www.lemonlaws.net

CONTINUING CASE (p. 211)

1. Jamie Lee is considering a used vehicle, but cannot decide where to begin her search. Using Your
Personal Financial Plan Sheets #19, name the sources available to Jamie Lee for a used car purchase.
What are the advantages and disadvantages of each?

Solution:

(Advantages/Disadvantages may vary)

Source Advantage Disadvantage

1. New-Car Dealer 1. Offer late model vehicles; Warranty 1. Prices are usually higher
may be available compared to other sources
2. Used-Car Dealer 2. Lower prices may be available 2. Vehicles may be older;
Warranties, if available, may be
limited

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3. Private-Party Sale 3. May be reasonably priced; Vehicle may 3. Buyers must beware!
(through Individuals) be well-maintained 4. Few consumer protection
regulations apply
4. Auctions 4. May be bargain priced as vehicles were5. May not have been meticulously
previously company/business/ maintained; Warranties may not
government vehicles be issued
5. Used-Car Superstores5. Large inventory of previously-owned 6. Complete vehicle maintenance
vehicles; history may not be provided;
6. May have passed a rigorous inspection Warranty may not be issued on
process before being added to the pre-owned vehicle
inventory;
7. Warranties may be issued

2. Jamie Lee is attracted to the low monthly payment advertised for a vehicle lease. She may well be
able to afford a more expensive car than she originally thought. Jamie Lee really needs to think this
through.
What are the advantages and disadvantages to leasing a vehicle?
Solution:
Leasing a Vehicle
Advantages Disadvantages
Vehicle is leased for a contracted or set period of You may grow tired of the vehicle before the lease
time contract term has ended
A small initial payment may all that is needed to Lease contract terms must be honored, or a penalty
get you in to the vehicle may be incurred
Monthly payments are usually lower compared You have no ownership of the vehicle
to a financed purchase of a vehicle
You may just “walk away” from the vehicle at You may incur additional expenses at the lease
the lease term’s end term’s end for damage, failure to maintain the
vehicle, additional mileage fees
May be a practical solution for those who You must be mindful of the mileage caps as stated
regularly drive few miles in the lease contract
A lease agreement provides detailed records for Salespeople may not be willing to negotiate on the
business purposes capitalized cost of the vehicle
There may be some tax advantages associated Interest rates may be higher on the lease compared
with business vehicle leases to an interest rate offered on a purchased vehicle
Lessees may drive “more car” or a more Lessee may be attracted to monthly payment only
expensive vehicle for the monthly payment than and not be aware of actual expenses associated
they could if they were purchasing a vehicle with the vehicle (personal property tax,
maintenance)
Lessee may be expecting an increase in income Capitalized payment may be too high at the end of
in the future where the low payments may make the lease where lessee may have to finance the
sense up front while planning for the residual residual value or walk away and begin another
payment at the lease end vehicle purchase process altogether

3. Jamie Lee sat down with a salesperson to discuss a new vehicle and its $24,000 purchase price. Jamie
Lee has heard that “no one really pays the vehicle sticker price”.
What guidelines may be suggested for negotiating the purchase price of a vehicle?

Solution:
Jamie Lee should research online sources for new car prices, such as Edmund’s New Car Prices and/or
Consumer’s Reports. With a starting point of the base car price and adding in the additional features,

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Jamie Lee can offer a figure between the dealer’s invoice, which is the cost paid by the dealer from the
manufacturer of the vehicle, and the sticker price which is the suggested retail price (which may also then
have additional dealer installed extras added to it).

Jamie Lee should understand that the automobile dealer is a business, and offer a reasonable starting
figure to which the salesperson would most likely relay to the business manager for approval or counter
offer. Jamie Lee should be firm on her ceiling offer and stick to it. Options may be added or deleted in
order to make the negotiations agreeable on both sides. For example, Jamie Lee may make an offer
somewhere in between the dealer’s invoice price and the vehicle’s sticker price, and may ask for an
extended warranty, lifetime oil changes, window tinting, pin stripes, or floor mats to make the deal
agreeable. Keep in mind that negotiations extend beyond the actual dollar price as extra goods and/or
services may be included in the active negotiation of the purchase price.

4. Jamie Lee has decided to purchase a certified pre-owned vehicle. What might she expect as far as
reliability and a warranty on the used car?

Solution:
Certified pre-owned vehicles come with the original manufacturer’s guarantee of quality. The vehicles
are usually automobiles that have been turned in at a lease’s end and may have limited miles on the
odometer. They are promoted as going through a rigorous inspection and repair process, which would
result in a higher price than would be sold without a warranty.
Jamie Lee should still have the vehicle inspected by a service technician of her choice and read the
warranty and associated exclusions carefully before making her final purchase decision.

DAILY SPENDING DIARY (p.212)

This activity can assist students with an ability to reduce unplanned buying and to better achieve long-
term financial goals.

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