Determining Purchase Price of a Company by kbd20030


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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.


After studying this chapter, students will be able to:

Obj. 1     Identify strategies for      Various economic, social, and personal factors influence daily
           effective consumer           buying decisions. Overspending and poor money management are
           buying                       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.
Obj. 2     Implement a process for      A research-based approach to consumer buying involves: (1)
           making consumer              preshopping activities, such as problem identification and
           purchases.                   information gathering; (2) evaluating alternatives; (3) determining
                                        the purchase price; and (4) postpurchase activities, such as proper
                                        operation and maintenance.
Obj. 3     Identify 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 the legal           Small claims court, class action suits, and the services of a lawyer
           alternatives available to    are legal means for handling consumer problems that cannot be
           consumers.                   resolved through communication with the business involved or
                                        through the help of a consumer protection agency.


     Ask students to comment on the opening case for the chapter (p. 241).
     Point out the learning objectives (p. 240) 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
     Discuss common causes of consumer problems and methods that could be used to resolve these


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
              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: Return to Place of Purchase
       B. Step 2: Contact the Company Headquarters
       C. Step 3: Obtain Consumer Agency Assistance
       D. Step 4: Take 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


 Financial Implications of Consumer Decisions (p. 242)
  Your daily buying habits are affected by a wide variety of economic, social, and personal
  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

 Practical Purchasing Strategies (p. 243)
  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 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. 246)
   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. 246)
  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. 247)
  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. 247)
  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
  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
  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.


    A specific decision-making process can help to make effective purchases.
 Phase 1: Preshopping Activities (p. 248)
    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
     5. government agencies
     6. online sources
 Phase 2: Evaluation of Alternatives (p. 249)
    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
    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. 249)
    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. 249)
 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

   Online used-car businesses, such as and
  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.
 Leasing a Motor Vehicle (p. 251)
  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. 253)
    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. 253)
  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. 253)
  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.


   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
   You will probably never be completely satisfied with every purchase you make. The
    process for resolving differences has four phases:
    1. Returning to the place of purchase
    2. Contacting the company’s main office
    3. Obtaining assistance from a consumer agency
    4. Taking 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.

   If all previously mentioned avenues of action fail to resolve a consumer complaint, legal
    action may be appropriate.
Small Claims Court (p. 261)
   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. 261)
   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. 262)
   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. 262)
   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. 262)
   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.


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