Finance 8 Personal Finance - Ch 6 Consumer Purchasing Strategies and Wise Buying of Motor Vehicles - Focus on Personal Finance - McGraw Hill 5 edition

Class-action suit

A legal action taken by a few individual on behalf of all the people who have suffered the same alleged injustice.

Steps to resolve consumer complaints

1-Initial communication 2-Communicate with the company 3-Consumer agency assistance 4-Legal action

P3a. Calculate the unit price: Motor oil - 2.5 quarts for $1.95

1.95/2.50 = .78 cents/quart

Extended Warranty

An agreement between a business and a consumer to cover the repair costs of a product, for a fee. Also called: SERVICE CONTRACT

True cost of leasing

Capitalized cost Money factor Payment schedule Residual value

Lowballing

Quoted a very low price that increases when add-on costs are included at the last moment

Impulse buying

Unplanned purchasing.

P1. 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?

$3,000 = 300 ÷ 10%

P7b. If a person saves $62 a month buy using coupons and doing comparison shopping. What would be the future value of this annual amount over 10 years, assuming an interest rate of 4 percent?

$744.00 x 12.006 (FV 4% for 10 yrs) = $8,932.46

6.2-1Q-What are the major sources of consumer information?

1-Personal contacts - allow you to learn about product performance, brand quality, and price from others 2-Business organizations - offer advertising, product labels, and packaging that provide information about price, quality, and availability 3-Media information - (TV, radio, newspapers, magazines, websites) can provide valuable information with purchasing advise. 4-Independent testing organizations - i.e. Consumers Union - provide information about the quality of products and services each month in Consumer Reports. 5-Government agencies - local, state, and federal provide publications, toll-free phone numbers, websites, and community programs 6-Online reviews -provide buying guidance and shopping suggestions- be cautions many are fictitious online pages

The major buying decisions should be based on a specific decision-making four phase process

1-Pre-shopping activities - -ID problem to set goal and focus on purchasing activities\ -Gather info to benefit from others' buying experience 2-Evaluating alternatives -Compare product features -Compare prices at various locations -Compare shopping activities to evaluate shopping locations. 3-Section and purchase -Negotiate to obtain lower price or added quality -Payment alternatives i.e. cash, credit plans 4-Postpurchase activities -Proper maintenance and operation -ID and compare after-sale service alternatives -Resolution of any purchase concerns that may occur.

An item was bought on credit with a $60 down payment and monthly payments of $70 for 36 months. What was the total cost of the item?

36 x 70 = $2,520 + 60 = $2,580

P2. 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?

80 + (35 x 24= 840) = $920 - $685 = $235.00

6.4-3Q-What legal action would be the most appropriate to take: A consumer wants to settle a dispute out of court with the use of a legally binding third-party.

Arbitration

6.3-3Q-How does arbitration differ from mediation?

Arbitration is the settlement of a difference by a 3rd-party - the arbitrator- whose decision is legally binding. Mediation involves the use of a 3rd-party - mediator - tries to resolve a conflict between a customer and a business through discussion and negotiation and is a non-binding process.

Consumer complaints 4-Legal action

Consider bringing case to small claims court Determine if class-action suit is appropriate Seek assistance from a lawyer or legal organization

What does overspending lead to?

Misuse of credit Financial difficulties

6.4-2Q-In what situations might you use the services of a lawyer?

More complicated matters, i.e. writing a will, settling a real estate purchase, or suing for injury damages.

6.1-1Q-What types of brands are commonly available to consumers?

National-brand - highly advertised items in many stores Store-brand - Sold by one chain of stores, are low-cost alternatives to famous-name products Private-label

Pre-shopping

Start by problem identification to set a goal Gather information to benefit from the buying experience.

Arbitration

The Settlement of a difference by a third party whose decision is legally binding.

Sticker price

The base price of the car with costs of added features.

What is the range available for negotiating for a new car.

The difference between the sticker price and the dealer's cost.

Money factor in leasing

The interest rate paid on the capitalized (price of car) cost

Payment schedule in leasinng

The monthly payment amount & the number of payments

P10b. Based on the data provided here, calculate the items requested: Annual depreciation, $2,500 Current year's loan interest, $650 Insurance, $680 Average gasoline prices, $3.50 per gallon Parking/tolls, $420 Annual mileage, 13,200 Miles per gallon, 24 License and registration fees, $65 Oil changes/repairs, $370

The operating cost per mile. 6,610.00 ÷ 13,200 = .501 cents per mile

P5. 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 coast of this fee?

$600 ÷ 3% = $20,000

P7a. If a person saves $62 a month buy using coupons and doing comparison shopping. What is the amount for the year?

$62 x 12 (months) = $744.00

P3c. Calculate the unit price: Canned fruit - 13 ounces for .89 cents

.89/13 = 6.8 cents/ounce

P12. 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?

1,400,000 - 300,000 = $1,100,000 ÷ 62,000 = $17.74

Leasing disadvantages

1- Have no ownership interest in vehicle 2- Must meet requirements similar to qualify for credit. 3- Additional costs may be incurred for extra mileage, certain repairs, turning the car early, or a move to another state.

A food package with 32 ounces costs $1.76. What is the unit cost of the package?

1.76 / 32 = 5.5 cents an ounce

P3b. Calculate the unit price: Cereal - 15 ounces for $2.17

2.17/15 = 14.5 cents/ounce

P3d. Calculate the unit price: Facial tissue - 300 tissues for $2.25

2.25/300 = .75 cents/100 tissues

Car-buying service

A business that helps buyers obtain a specific new car at a reasonable price. Also called: AUTO BROKER

Auto Broker

A business that helps buyers obtain a specific new car at a reasonable price. Also called: CAR-BUYING SERVICE

Small claims court

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

Lemon law

A refund for the vehicle after the owner has made four (4) attempts to obtain servicing within12 months of purchase or 12,000 miles

6.1-3Q-How does a service contract differ from a warranty?

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

Post-purchase activities

After purchase Proper maintenance and operation Id and compare after-sale service alternatives Resolution of any purchase concerns

6.4-3Q-What legal action would be the most appropriate to take: A group of telephone customers were overcharged by $1.10 a month over the past 22 months.

Class-action suit

6.2-2Q-What actions are appropriate when buying a used car?

Compare prices

6.1-2Q-In what situations can comparing prices help in purchasing decisions?

Comparing prices can be helpful when buying expensive items, competing brands are available, different package sizes are available, and product quality varies.

Implied warranty

Covers a product's intended use or other basic understandings that are not in writing. i.e. used car

Express warranty

Covers only certain aspects of the product i.e. parts

Open dating

Describes the freshness or shelf life of the perishable product.

6.2-3Q-When might leasing a motor vehicle be appropriate?

For business use Changing vehicles every few years

Implied warranty of merchantability

Guarantees that the product is fit for the ordinary uses for which it is intended. Guaranteed to do what it is supposed to do. i.e. toaster must toast bread MP3 player must play music

Research-based buying phases

Has four phases 1-Pre-shopping activities 2-Evaluating alternatives 3-Selection and purchase 4-Postpurchase activities

National-brand products

Highly advertised items available in many stores

Warranty of title

Indicates the seller has the right to sell the product.

6.4-3Q-What legal action would be the most appropriate to take: A low-income person wants to obtain the services of a lawyer to file a product-liability suit.

Legal aid society

"As is"

No warranty and the dealer assumes no responsibility for any repairs.

Legal aid society

One of a network of publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney.

New-car warranties

Provide buyers with an assurance of quality. The main conditions of a new-car warranty are 1-Coverage of basic parts against defects 2-Power train coverage for the engine, transmission, and drive train 3-Th corrosion warranty applies only to holes due to rust, not to surface rust. 4-A statement regarding whether the warranty is transferable to other owners of the car, details about the charges that will be made for major repairs in the form of a deductible.

P11. Based on the following, calculate the costs of buying versus leasing a motor vehicle. (LO6.2) Purchasing Costs Down payment, $1,500 Loan payment, $450 for 48 months Estimated value at end of loan, $4,000 Leasing Costs Security deposit, $500 Lease payment, $450 for 36 months End-of-lease charges, $600 Opportunity cost interest rate, 4 percent

Purchase: $1,500 + ($450 x 48 = $21,600) + $240 - $4,000 = $19, 340 Lease: ($450 x 36 = $16,200) +(500 x 3 x 4% = $60.00) + 600 = $16,860

Consumer complaints 1-Initial communication

Return to place of purchase or contact online Provide detailed explanation & action desired Be pleasant yet persistent in obtaining a resolution

6.4-3Q-What legal action would be the most appropriate to take: A person is attempting to obtain a $150 catering deposit that was never returned.

Small claims court

Store-brand and Private-lable products

Sold by one chain or stores Are low-cost alternative to famous-name products

What are the factors that affect daily buying habits?

Spending Saving Investing Achieving personal financial goals

Capitalized cost in leasing

The price of the car

Upside-down

The value of car may be less than the amount owed. Also called: NEGATIVE EQUITY

Negative equity

The value of car may be less than the amount owed. Also called: UPSIDE-DOWN

Upside-down (negative equity)

The value of item is less than the amount owed

Set-price dealers

Use no-haggling car selling with the prices presented to be accepted or rejected as stated.

P8. 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 $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.

Vehicle 1: Younger car, less mileage, more money down Vehicle2: Older car, more mileage, less money down

6.3-1Q-What are common causes of consumer problems and complaints?

Warranties - Advance Factors Service availability Defective products Low quality Short product lives Unexpected costs Deceptive pricing Poor repairs

Selection and purchase

When making your final choice Negotiate to obtain lower price or added quality Payment alternatives cash and various credit plans Assessment of acquisition and installation that might be encountered

Highballing

When offered a very high amount for a trade-in vehicle, with the extra amount made up by increasing the new-car price

Leasing

a contractual agreement with monthly payments for the use of an automobile over a set time period 3, 4, 5 years.

Automotive service contract

covers repairs not included in the manufacturer's warranty.

Comparison shopping

the process of considering alternative stores, brands, and prices.

Compulsive buying

uncontrollable desire to shop

The two vital factors in negotiating

1- Having all the necessary information about the product and buying solution 2- Dealing with a person who has the authority to give you a lower price or additional features. i.e. owner, store manager

Leasing advantages

1- Only a small cash outflow for security deposit vs. buying require a large down payment. 2- Monthly lease payments are lower than monthly financing payments. 3- Lease agreement provides detailed records for business purposes. 4- Able to obtain a more expensive vehicle

Rebate

A partial refund of the price of a product.

Warranty

A written guarantee from manufacturer or distributor of a product that specifies the conditions under which the prodcut can be returned, replaced, or repaired

Service contract

An agreement between a business and a consumer to cover the repair costs of a product, for a fee. Also called: EXTENDED WARRANTIES - which are not warranties.

Invoice price

An amount less than the sticker price

6.3-2Q-How can most consumer complaints be resolved?

At the original sales location, as you talk with the salesperson, customer service person, or store manager.

Evaluating alternatives

Attribute assessment with a comparison of product features Price analysis consider the cost at various locations Comparison shopping

P9a. Based on the following data, prepare a financial comparison of buying and leasing a motor vehicle with a $24,000 cash price. Buy: Down payment (to finance vehicle), $4,000 Monthly loan payment, $560 Length of loan, 48 months Value of vehicle at end of loan $7,200 Lease: Down payment for lease, $1,200 Monthly lease payment $440 Length of lease, 48 months End-of-lease charges, $600

Buy: $4,000 + ($560 x 48 = 26,880) - $7,200 = $23,680 Lease: $1,200 + ($440 x 48 = 21,120) + 600 = $22,920

Mediation

The attempt by an impartial third party to resolve a difference between two parties through discussion and negotiation.

Residual value in leasing

The expected value of the car at the end of the lease

Consumer complaints 3-Consumer agency assistance

Seek guidance from local, state, or federal consumer agency Determine if any laws have been violated in situation Consider the use of mediation or arbitration

Unit price

Uses a standard unit of measurement to compare the prices of packages of different sizes. Formula: Unit price = price of the item / the number of units of measurement.

Limited warranty

Usually in written form created by the seller or manufacturer & has two forms: 1-Full warranty 2-Limited warranty

Certified pre-owned (CPO)

Vehicles nearly new cars that come with the original manufacturer's guarantee of quality

P6. What would be the net present value of a microwave oven that costs $159 and will save your $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.)

$68 x 4.452 (PV 4% for 5 yrs) = $302.74 - $159.00 = $143.74

P9b. What other factors should a person consider when choosing between buying and leasing?

Buying: Owning a car Leasing: New car every renewal

Consumer complaints to Communicate with company

Send an email with detail of situation Post your concerns on company's online social media sites Comment on a blog or a consumer review website

Depreciation

The loss in value due to time and use.

P10a. Based on the data provided here, calculate the items requested: Annual depreciation, $2,500 Current year's loan interest, $650 Insurance, $680 Average gasoline prices, $3.50 per gallon Parking/tolls, $420 Annual mileage, 13,200 Miles per gallon, 24 License and registration fees, $65 Oil changes/repairs, $370

The total annual operating cost of the motor vehicle. $2,500 + $650 + $680 + $65 = $3,895 (13,200 x 24 x $3.50 = 1,925) + $420 + $370 = $2,715.00 $6,610.00

P4. A service contract of 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?

$70 x 5.309 (FV 3% for 5 yrs) = $371.63

6.4-1Q-In what types of situations would small claims court and class-action suits be helpful?

Small claims situations filing a claim involving amounts below a set dollar limit maximum varies from state to state ranging from $500 - $10,000, limit between $1,500 and $3,000. Class-action suits situations (a number of people having the same complaint) auto owners who were sold unneeded replacement parts, a group of investors who sued a brokerage company for unauthorized buy-and-sell transaction that resulted in high commission charge.

Full warranty

States that a defective product can be fixed or replaced during a reasonable amount of time.