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CONSUMER PURCHASING

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:

Obj. 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.
Obj. 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.
Obj. 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.
Obj. 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.

 

 

 

 

 

 




INTRODUCTORY ACTIVITIES

  • Ask students to comment on their responses to the “My Life” chapter opening exercise (p. 243).
  • Point out the learning objectives (p. 243) 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.

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

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

 

 

 

 

 


 

CHAPTER 8 LECTURE OUTLINE

Instructional Suggestions

 
  I. CONSUMER BUYING ACTIVITIES (p. 244)

Financial Implications of Consumer Decisions (p. 244)

  • 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, 8-3, and 8-4.

 

 
  Practical Purchasing Strategies  (p. 245)

  • 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.
 

  • Use PPT slides 8-5 and 8-6.

 

 

 

 

 

 

 

  • Assignment: Have students conduct a survey to determine the factors that influence store choice among consumers.

 

 

 

 

 

 

 

 

  • Text Highlight: Exhibit 8-2   (p. 248) provides a summary of suggested wise buying techniques  (Transparency Master 8-6).

 

 

 

 

 
  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. 247)

  • 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. 247)

  • 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. 248)

  • 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. 248)

  • 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.

 

 

  • Transparency Master 8-5 provides examples of unit pricing.
  • Current Example: In an attempt to compete against national appliance retailers, Sun Television & Appliances, a regional chain in Ohio, took drastic action to keep their prices competitive. Sun customers do not have to return to the store to obtain a refund when a competitor has a lower price. Instead, Sun automatically sends a customer a check if somebody else beats its price within 30 days. While the average refund has been $3.90, one Cincinnati man received a $97 refund check.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Concept Check 8-1 (p. 249)
 
  II. MAKING MAJOR CONSUMER PURCHASES: BUYING MOTOR VEHICLES (p. 250)

  • A specific decision‑making process can help to make effective purchases.

Phase 1: Preshopping Activities (p. 250)

  • 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. 251)

  • 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.

Selecting Vehicle Options (p. 251)

  • 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. 253)

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 repair process means a higher price than other used vehicles.

Leasing a Motor Vehicle (p. 254)

  • 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
    • The capitalized cost, which is the price of the vehicle.
    • The money factor, which is the interest rate being paid on the capitalized cost.
    • The monthly payment and number of payments.
    • 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.

 

 

  • Use PPT slide 8-7.
  • Discussion Question: How can consumers determine if information from advertising and other business sources is reliable?
  • Transparency Master 8-1 provides an overview of the phases involved in the research‑based approach for consumer purchasing.
  • Transparency Master 8-2 is an overview of common advertising techniques used to influence consumers.
  • Transparency Master 8-3 presents a framework for the evaluation of consumer purchase alternatives.
  • 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 with this behavior disorder.

 

  • Use PPT slide 8-8.

 

 

 

 

 

 

 

 

  • Exercise: Create a list of the most popular optional features for motor vehicles, and discuss their costs and benefits.

 

 

 

 

 
   

 

 

 

Phase 3: Determining Purchase Price (p. 255)

  • 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. 255)

  • 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. 255)

  • 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 8-9. 8-10.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Use PPT slide 8-9.

 

 

 

 

 

 

 

  • Use PPT slides 8-13 and 8-14.

 

 

 

 

 

 

  • Use PPT slide 8-16.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Use PPT slides 8-17.

 

 

 

  • Use PPT slide 8-10.

 

 

 

 

 

  • Use PPT slide 8-22 and 8-23.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Transparency Master 8-9 lists common automobile repair frauds.
  • Concept Check 8-2 (p. 256)
 
     
  Comparing Financing Alternatives (p. 256)

  • 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. 257)

  • 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. 257)

  • 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 slide 8-11.

 

  Motor Vehicle Maintenance (p. 258)

  • 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. 258)

  • 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.

 

 

 

 

 

 

 

 

 

  • Concept Check 8-2 (p. 259)

 

CHAPTER 8 LECTURE OUTLINE

Instructional Suggestions

 


III. RESOLVING CONSUMER COMPLAINTS (p. 259)

  • 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. 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.
  • Use PPT slide 8-12.
  • Text Highlight: Exhibit 8-9 (p. 262) suggests a format for a complaint letter when contacting a business or consumer agency.
  • Supplementary Resource: Have students access the Consumer Resource Handbook at www.pueblo.gsa.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.
 

  • Concept Check 8-3 (p. 263)

 

CHAPTER 8 LECTURE OUTLINE

Instructional Suggestions



IV. LEGAL OPTIONS FOR CONSUMERS (p. 264)

  • If all previously mentioned avenues of action fail to resolve a consumer complaint, legal action may be appropriate.

Small Claims Court (p. 264)

  • 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. 264)

  • 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. 264)

  • 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. 265)

  • 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. 265)

  • 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 8-13.
  • 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?
  • 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 Web sites have been created by consumers wishing to let others know of their dissatisfaction with a company. This article details the experiences of three consumer Webmasters who have taken their story to the Internet. One search engine, Yahoo!, has set up a category (“consumer opinion”) for these types of Web sites.
 

 

 

 

 

 

  • Text Reference: The “Personal Finance in Practice” feature on page 266 provides an opportunity to discuss various business practices in relation to potential legal violations.

 

  • Concept Check 8-4 (p. 266)

 




CONCLUDING ACTIVITIES
  • Point out the chapter summary (p. 267) and key terms in the text margin.
  • Discuss selected end-of-chapter Financial Planning Problems, Financial Planning Activities, Life Situation Case, and Digital Case.
  • Use Chapter Quiz in the Instructor’s Manual.
  • Refer students to activities and readings in the Student Resource Manual for Chapter 8.
WORKSHEETS FROM PERSONAL FINANCIAL PLANNER FOR USE WITH
CHAPTER 8    

Use the “Your Personal Financial Planner in Action” (p. 271) 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. 250) 6. B (p. 247)
2. T (p. 251) 7. A (p. 253)
3. T (p. 245) 8. D (p. 255)
4. T (p. 247) 9. A (p. 263)
5. F (p. 260) 10. C (p. 265)


Name_____________________________________             Date__________________________


CHAPTER 8 QUIZ

TRUE-FALSE

The first element in a purchasing decision is gathering information.
Consumer information from business organizations includes advertising, product labels, and packaging.
National name products usually cost more than store brands or generics.
An express warranty is usually in a written form.
Most consumer complaints are resolved with the use of a government agency or by taking legal action.

 

MULTIPLE CHOICE

A(n) __________ warranty covers most repairs of a product.

  1. limited
  2. implied
  3. full
  4. express
The highest prices for used cars are usually at a

  1. new-car dealer.
  2. used-car dealer.
  3. private-party sale.
  4. public auto auction.
When leasing a motor vehicle, the capitalized cost refers to the

  1. security deposit.
  2. residual value.
  3. interest rate.
  4. price of the vehicle.
A legally binding decision by a third part is

  1. arbitration.
  2. mediation.
  3. a legal society.
  4. a pre-paid legal service.
__________ are publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney.

  1. Small claims court
  2. Class action suits
  3. Legal aid societies
  4. Legal clinics




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


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.








ANSWERS TO CONCEPT QUESTIONS, FINANCIAL PLANNING PROBLEMS,

 

FINANCIAL PLANNING ACTIVITIES, FINANCIAL PLANNING CASE, DIGITAL

CASE, AND CONTINUING CASE

 

   

CONCEPT QUESTIONS

Concept Check 8-1 (p. 249)

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. 244)

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. 244), 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. 245)

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. (pp. 246-247)

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. 247)

Action Application: In recent years, increased competition and expanded availability to information (such as the Internet) has tended to reduce brand loyalty in our society. This activity can provide students with an understanding of how brand loyalty affects buying habits.

Concept Check 8-2 (p. 259)

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. (pp. 251)

 

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?

 

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.

 

Action Application:  Students should discuss the advantages and disadvantages of obtaining these products at different types of businesses. While in some situations a higher price may mean better quality, which is not likely to always be true.

Concept Check 8-3 (p. 263)

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. (pp. 259-260)

2.   How can most consumer complaints be solved?

Most consumer complaints are solved by contacting the store or company office. (pp. 260)

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. 263)

Action Application:   Ask students to compare their findings to the items listed on pages 259-260.

 

Concept Check 8-4 (p. 266)

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. 264)

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. (pp. 264-265)

Action Application: This activity can be helpful for students to better understand the process of resolving consumer complaints.

FINANCIAL PLANNING PROBLEMS (p. 267)

1.   Use advertisements, recent news articles, and personal observations to point out the economic, social, and personal factors that influence the purchases of the people in the following life situations:

a.   A retired person

b.   A single parent with children aged five and nine

c.   A dual‑income couple with no children

d.   A person with a dependent child and a dependent parent

Student answers will vary based on information collected. Refer to text p. 244.

2.  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 would pay for the service contract?

$180  12.578 (PVA 5%, 10 years) = $2,264.04

 

3. 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?

 

(a) $63 X 12 = $756; (b) $756 X 12.006 = $9,076.54

 

4.   Tammy Monahan is considering the purchase of a home entertainment center. The product attributes and weights she plans to consider are:

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. 252), conduct a quantitative product evaluation rating for each brand. What other factors is Tammy likely to consider when making her purchase?

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.

5.   Using the Consumer Buying Matrix (p. 252), 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.

6.   John Walters is comparing the cost of credit to the cash price of an item. If John makes a $60 down payment, and pays $34 a month for 24 months, how much more would that be than the cash price of $695?

[($34  24 months) + $60] ‑ $695 = $181

7.   Calculate the unit price of each of the following items:

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

8.   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.

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

9.   Use “Financial Planning Calculations: Net Present Value of a Consumer Purchase” (p. 246) to analyze a past or future purchase.

This assignment will encourage students to consider various costs and benefits of a major consumer purchase.

10.  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

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.

11.  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  

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.

 

12. 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

 

Purchase:  $1,500 + [450 X 48] – 4,000 + [1,500 X .04 X 4] = $19,340

Lease:  [450 X 36] + 600 + [500 X .04 X 3] = $16,860

 

FINANCIAL PLANNING ACTIVITIES (p. 269)

1.   Using a Web search, library resources, or a survey of acquaintances, determine the major factors people consider when (a) buying food, (b) selecting a store at which to shop, and (c) using information from advertisements.

This assignment should expand student awareness of consumer buying patterns and motivations. Have students prepare a summary of their findings along with suggestions for wise purchasing.

2.   Obtain a recent issue of Consumer Reports (or go to www.ConsumerReports.org) to evaluate and compare different brands of a product. Also obtain information on this product from people who sell and who have recently purchased this item. Compare the information received from these sources.

The product reviews and ratings in Consumer Reports can provide helpful insight into a purchase. But the magazine’s results can sometimes be different from those of individual consumers. Have students report on their findings of differences between what was in the article and what consumers experienced with the product.

Encourage students to start with the Web sites listed in the “Your Personal Financial Planner in Action”

3.     Use Sheet 35 in the Personal Financial Planner to compare different sources of used motor vehicles.

This activity can involve use of advertisements and a Web 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.

4.     Use Sheet 36 in the Personal Financial Planner to compare the costs of buying and leasing a motor vehicle.

A increasing number of organizations are offering leases on motor vehicles. Encourage students to use dealer visits, advertisements, and Web sites to obtain information for this activity.

5.    Collect print or online advertisements that appear to be “too good to be true.” Why are these ads deceptive? Should government agencies take action against any of the companies that presents these ads? Additional information about common frauds may be obtained at www.fraud.org

Once again, this activity can provide insight into causes of common consumer complaints as well as areas where government action may be appropriate.

6.     Prepare a survey of legal services available to students and others in your community. Use Sheet 35 in the Personal Financial Planner to compare the fees and services provided by lawyers and other sources of legal assistance.

Some colleges have legal services available for students, this alternative should be considered along with others.

INTERNET CONNECTION

Obtaining Consumer Protection Assistance (p. 269)

 

After obtaining this data, students should be able to better understand sources of consumer assistance.  Also, have students report the key findings from their research.

FINANCIAL PLANNING CASE

Online Car Buying (p. 270)

 

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.

 

DIGITAL CASE

“The Cheapest of Them All” (p. 270)

1.    What actions can help a person control spending to achieve better personal financial security?

 

Know your needs and priorities to avoid spending money on items that have little lasting value.  Collecting information for a variety of sources will allow for better comparison shopping and wiser spending.

 

2.   How might spending extensive time and effort for a bargain result in reduced financial benefits?

 

Shoppers should put a value on their time and effort in order to best use all resources.  Unwise use of time to save a small amount may not be in a person’s best intest.

 

CONTINUING CASE

Purchasing Choices (p. 271)

1.   What major factors could affect the Brocks’ spending habits?

 

The fact that the Brocks have two preschool-age children is affecting their spending habits. As a result, Pam has chosen to “retire” for a while. This means that the Brocks must live on Josh’s salary.

 

2.   What transportation alternatives should the Brocks consider? If they decide that they need a second motor vehicle, how should they finance it?

 

Assuming the Brocks decide they need a second automobile, they must determine if they should purchase a new or a used automobile. Each option has advantages and disadvantages. Ideally, they would pay cash for the automobile. If they purchase a new, expensive automobile, they will probably have to finance their automobile. Given the fact that the Brocks are considering the purchase of a home, a used car may be appropriate for the Brocks at this time.

 

3.   Describe how various elements of Personal Financial Planner sheets 32-39 could be useful to the Brocks when making various purchasing decisions?

 

Have students highlight various aspects of these sheets that they believe could help the Brocks to better plan and implement buying decisions.

 

DAILY SPENDING DIARY (p. 272)

 

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


TM 8-1    A Research-Based Approach to Consumer Purchases (Exhibit 8-3)

 

 

 

 

 

 

 

 

 

 

 

TM 8-2    Common Advertising Techniques

 

 

 

 


TM 8-3    Consumer Buying Matrix

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


TM 8-4    Practical Purchasing Strategies

 

 

 

 

 

 

 


TM 8-5    

 

 

 

Unit Pricing

 

 

 

Total price of an item divided by the cost per unit (ounces, pound, gallon, number of sheets)

 

Examples …

 

  • a 16-ounce bottle selling for 80 cents has a unit price of 5 cents an ounce

 

  • a 2.5 gallon selling for $8 has a unit price of $3.20 per gallon

 

  • 350 napkins selling for $2.52 has unit price of 72 cents per 100 napkins

 


TM 8-6    Wise Buying Techniques: A Summary (Exhibit 8-2)

 

  • Compare brands of similar products to determine which is best for your intended use.
  • Compare stores and online buying sources with regard to prices, services offered, product quality, and return privileges.
  • Read and evaluate label information.
  • Use coupons for products that you buy regularly or are trying out.
  • Use unit pricing to compare packages of different sizes.
  • Obtain “rain checks” for out-of-stock advertised specials that you can use for purchase later.
  • Use open dating to determine the freshness and shelf life of perishable products.
  • Use various consumer information sources to assist you with your buying decisions.
  • Consider the nutritional value and the health aspects of the foods you buy.
  • Evaluate and compare the warranties of different brands.
  • Read product testing reports to determine which items are the safest and of the highest quality.
  • Plan your purchases to take advantage of sales and special offers.
  • Consider the time and effort it takes to evaluate alternatives and go to different stores.


TM 8-7    Suggested Steps for Resolving Consumer Complaints (Exhibit 8-8)

 

 


TM 8-8     Sample Complaint Letter (Exhibit 8-9)

 

EXHIBIT 8-9 from p. 262 of text

 

 

 

 

 

 

 

TM 8-9    Common Automobile Repair Frauds (Exhibit 8-7)

 

 

The majority of automobile servicing sources are fair and honest. Sometimes, however, consumers waste dollars when they fall prey to the following tricks:

 

  • When checking the oil, the attendant may put the dipstick only partway down and then use it to show that you need oil.

 

  • An attendant cuts a fan belt or punctures a hose. Watch carefully when someone checks under your hood.

 

  • A garage employee may put some liquid on your battery and then tries to convince you that it is leaking and you need a new battery.

 

  • Removing air from a tire instead of adding air to it can make an unwary driver open to buying a new tire or paying for an unneeded patch on a tire that is in perfect condition.

 

  • The attendant may put grease near a shock absorber or on the ground and then tells you that your present shocks are dangerous and you need new ones.

 

  • You are charged for two gallons of antifreeze with a radiator flush, when only one gallon was put in.

 

Dealing with reputable businesses and having a basic knowledge of your automobile are the best methods of preventing deceptive repair practices.

 

 

0

Arrange the tasks shown

CASE 11-1: EASING IRA’S IRE

Question 1: Arrange the tasks shown in Exhibit 11-A in a network or PERT chart.

A chart with three paths results. They, and their completion times, are:

A B C H I L                             6.50 days

A D E F K L                            6.45 days

A D G J L                                            8.00 days

The case does not indicate whether it is necessary to complete A before beginning B. This could be discussed in class.

Question 2: Determine the critical path. What is the least amount of time it takes between receipt of an order and its delivery to a customer?

The critical path is A D G J L and it takes 8 days.

Question 3: Considering your answers to Questions 1 and 2, what areas of activity do you think Wood should look at first, assuming she wants to reduce order processing and delivery times? Why?

She should, of course, look at the critical path because it takes the longest and is controlling. Items G and J seem like candidates.

Question 4: Now that she is a Californian ready for the race down the information superhighway, Wood wants to be able to impress Pollack in terms of her knowledge of current technology. Recently a sales representative from a warehouse equipment company called, trying to interest her in installing a “Star Wars-Robotic” order picker for the warehouse. Controlled by lasers and powered by magnetic levitation, the device can pick orders (task H) in 15 minutes, rather than 6 hours (.75 days), the current time. How valuable would such a device be for Wood? Why?

Although the “Star Wars-Robotic” order picker offers impressive time savings, it would appear to offer limited immediate advantages in the sense that overall completion time along the critical path would be unaffected.


 

Question 5: Another alternative is to use faster transportation. How should Wood choose between paying more for faster transportation and paying more for other improvements? Assume that her only goal is speed.

See the answer to question 3. Wood should look at all costs along the critical path. Any improvement would have to be an item on the path; and the cost of each improvement would have to be compared with the time savings it provides.

Question 6: To offset some of the costs of speeding up the system, does the PERT chart indicate where there might be some potential savings from assigning fewer people to some tasks, thereby increasing the amount of time needed to complete these tasks? If so, which tasks are likely candidates? Why?

Wood should explore transferring workers from tasks not on the critical path, such as B, C, E, F, H, I, or K, and these workers should be transferred to tasks on the critical path. She could do this so long as the function from which the workers were transferred does not become part of a new critical path.

 

 

0

What is procuremen

Chapter 11 Questions

  1. What is procurement? What is its relevance to logistics?

Procurement refers to the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations. It is closely related to logistics since acquired goods and services must be entered into the supply chain in the exact quantities and at the precise time they are needed.

3.      Discuss three potential procurement objectives.

The text provides five potential procurement objectives that could be discussed. They are supporting organizational goals and objectives; managing the purchasing process effectively and efficiently; managing the supply base; developing strong relationships with other functional groups; supporting operational requirements.

10.    Discuss the Malcolm Baldrige National Quality Award.

The Malcolm Baldrige National Quality Award was established in the 1980s to recognize U.S. organizations for their achievements in quality and performance. The Baldrige Quality Awards, which are restricted to organizations headquartered in the United States, require interested parties to submit a formal application that is evaluated by a committee largely made up of private sector experts in business and quality. Seven categories are evaluated: business results; customer and market focus; human resource focus; leadership; measurement, analysis, and knowledge management; process management; and strategic planning.

 

 

Chapter 12 Question

 

2.         Discuss some of the challenges associated with international logistics.

 

Economic changes, such as changes in the relative value of currencies, have a profound affect on international trade patterns. When one country’s currency is weak relative to other countries, it becomes costly to import products but exports often surge; when one country’s currency is strong relative to other currencies, the opposite occurs.

Differences in regulations, laws, and legal systems also add to the challenges of international logistics and the degree of enforcement of existing regulations and laws is not uniform from country to country. Cultural considerations, such as differences in language, also contribute to international logistics challenges. Moreover, for goods moving in cross-border trade, it is not safe to assume that cargo handlers can read English and it would not be unusual for some cargo handlers to be illiterate.

 

 

12.       What are the two primary purposes of export packing?

 

One function is to allow goods to move easily through customs. For a country assessing duties on the weight of both the item and its container, this means selecting lightweight packing materials. The second purpose of export packing is to protect products in what almost always is a more difficult journey than they would experience if they were destined for domestic consignees.

0

Ben Collins plans to

SOLUTION TO CHAPTER 1

1.   Ben Collins plans to buy a house for $65,000. If that real estate property is expected to increase in value 5 percent each year, what would its approximate value be seven years from now?

$65,000 ´ 1.407 = $91,455

2.   Using the rule of 72, approximate the following:

a.   If land in an area is increasing six percent a year, how long will it take for property values to double?

About 12 years (72 / 6)

b.   If you earn ten percent on your investments, how long would it take for your money to double?

About 7.2 years (72 / 10)

c.   At an annual interest rate of five percent, how long would it take for your savings to double?

About 14.4 years (72 / 5)

3.   In the late 1980s, selected automobiles had an average cost of $12,000. The average cost of those same motor vehicles is now $15,000. What was the rate of increase for this item between the two time periods?

($15,000 ‑ $12,000) / $12,000 = .25 (25 percent)

4.   A family spends $28,000 a year for living expenses. If prices increase by four percent a year for the next three years, what amount will the family need for its living expenses?

$28,000 ´ 1.12 = $31,360

5.   What would be the yearly earnings for a person with $6,000 in savings at an annual interest rate of 5.5 percent?

$6,000 ´ .055 = $330

6.   Using time value of money tables, calculate the following:

a.   The future value of $450 six years from now at 7 percent.

$450 ´ 1.501 = $675.45

b.   The future value of $800 saved each year for 10 years at 8 percent.

$800 ´ 14.487 = $11,589.60

c.   The amount that a person would have to deposit today (present value) at a 6 percent interest rate in order to have $1,000 five years from now.

$1,000 ´ .747 = $747

d.   The amount that a person would have to deposit today in order to be able to take out $500 a year for 10 years from an account earning 8 percent.

$500 ´ 6.710 = $3,355

7.   Elaine Romberg prepares her own income tax return each year. A tax preparer would charge her $60 for this service. Over a period of 10 years, how much does Elaine gain from preparing her own tax return (assumes that she earn 6 percent on a savings account)?

$60 ´ 13.181 = $790.86

 

0

Computer Boutique sells

1)     Computer Boutique sells computer equipment and home office furniture. Currently, the furniture product line takes up approximately 50% of the company’s retail floor space. The president of Computer Boutique is trying to decide whether the company should continue offering furniture or just concentrate on computer equipment. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13%. Allocated fixed costs are assigned based on relative sales.
 

 

Computer

Home Office

 

Equipment

Furniture

      Total

Sales

$1,200,000

$800,000

$2,000,000

Less cost of goods sold

  700,000

  500,000

1,200,000

Contribution margin

  500,000

  300,000

   800,000

Less direct fixed costs:

          Salaries

175,000

175,000

350,000

          Other

60,000

60,000

120,000

Less allocated fixed costs:

          Rent

14,118

9,882

24,000

          Insurance

3,529

2,471

6,000

          Cleaning

4,117

2,883

7,000

          President’s salary

76,470

53,350

130,000

          Other

     7,058

     4,942

   12,000

Total costs

 340,292

 380,708

 649,000

Net Income

$159,708

($ 8,708)

$151,000

         

Prepare an incremental analysis to determine the incremental effect on profit of discontinuing the furniture line

We make an analysis with the line and without the line

  With Furniture Without
  Line Furniture
Sales            2,000,000     1,356,000 (1,200,000 X 13%
Less cost of goods sold            1,200,000        791,000 (700,000 X 13%)
Contribution margin               800,000        565,000
Less direct fixed costs:  
          Salaries               350,000        175,000
          Other               120,000          60,000
Less allocated fixed costs:  
          Rent                 24,000          24,000
          Insurance                  6,000           6,000
          Cleaning                  7,000           7,000
          President’s salary               130,000        130,000
          Other                 12,000          12,000
Total costs               649,000        414,000
Net Income               151,000        151,000

 

With the furniture line we have the net income as given for the total. If the furniture line is discontinued, all sales, variable costs and direct fixed costs would also be eliminated. The sales will be now of Computer equipment and will be higher by 13%. The contribution margin will also be higher by 13%. The direct fixed costs would for Computer equipment. The allocated fixed costs would be the same as total since these costs will remain the same.

As we can see from the analysis, the net income is the same under both the options. There will be no effect on profits of dropping the Furniture line.

2)     Beach Rentals has estimated that fixed costs per month are $79,200 and variable cost per dollar of sales is $0.52.

(a) What is the break-even point per month in sales?

 

Breakeven sales = Fixed cost/contribution margin ratio

Contribution margin ratio = 1-variable cost = 1-0.52 = 0.48

Breakeven sales = 79,200/.48 = $165,000

 
(b) What level of sales is needed for a monthly profit of $24,000?

 

Sales needed for monthly profit = (Fixed cost + desired profit)/contribution margin ratio

=(79,200 + 24,000)/0.48

= $215,000
(c) For the month of July, the company anticipates sales of $240,000. What is the expected level of profit?

 

Profit = Contribution margin – fixed cost

= 240,000 X 0.48 – 79,200

= $36,000

 

3)     Peak Manufacturing produces snow blowers. The selling price per snow blower is $100. Costs involved in production are:

Direct Material per unit

$20

Direct Labor per unit

12

Variable manufacturing overhead per unit

10

Fixed manufacturing overhead per year

$148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Peak produces 45,000 snow blowers and sells 30,000 snow blowers. How much is net income using full costing?
$1,641,000
$1,590,000
$1,441,500
$1,491,000

Fixed manufacturing cost per unit = 148,500/45,000 units produced = 3.3

Total manufacturing cost = 20+12+10+3.3 = 45.30

The net income is

Sales (30,000 X $100)            3,000,000
Cost of goods sold (30,000 X 45.3)            1,359,000
Gross Profit            1,641,000
Selling and admn cost               150,000
Net Income            1,491,000

 

 

 

 

 

0

Order processing

Order processing has been developing in the world now being focus getting shift on the speedy sale and time efficiency. Firstly the orders were processed manually, that were so much time consuming and tardy. But now the technology has come to fore computers are a big hit from a small grocery store to multinational chains like Wal-Mart. Under this the whole process has change and consumers are enjoying speedy process. But still this is not what can be there in technology as this systems lack what is needed. Now the order processing systems should be multi-functioned in which the need of the consumer as well as the seller would be addressed in which the software and technology should be able to check the credit card authentication as soon as card payment is made, system should be able to address the problems of front and back end operations, the system should be able to manage distributions and doing well with the advanced accounting systems.

0

Determining Profit

Week 4 Homework

Solutions: Problem Set 4

1.  Determining Profit or Loss from an Investment.  Three years ago, you purchased 150 shares of IBM stock for $88 a share.  Today, you sold your IBM stock for $103 a share.  For this problem, ignore commissions that would be charged to buy and sell your IBM shares.

 

a.  What is the amount of profit you earned on each share of IBM stock?    The profit on each share of IBM stock was $15.  $103 priced when each share was sold, $88 priced when each share was purchased = $15.

 

            bWhat is the total amount of profit for your IBM investment?  The total profit for the IBM transaction was $2,250.  $15 profit per share x 150 shares = $2,250.

 

 

2.  Calculating Rate of Return. Assume that at the beginning of the year, you purchase an investment for

$8,000 that pays $100 annual income. Also assume the investment’s value has decreased to $7,400 by the end of the year.

 

  1. What is the rate of return for this investment?

Step 1 subtract the investment’s initial value from the investment’s value at the end of the year.

$7,400 – $8,000 = $600 (negative)

Step 2 add the annual income and the amounts from Step 1.

$600 (negative) + $100 = $500 (negative)

Step 3: divide the total dollar amount of return (Step 2) by the original investment

$500 (negative) ÷ $8,000 = .0625 (negative) = 6.25% (negative)

 

  1. Is the rate of return a positive or negative number? The rate of return is a negative number.

 

 

3.  Calculating Earnings Per Share, Price-Earnings Ratio, and Book Value. As a stockholder in Bozo Oil Company, you receive its annual report. In the financial statements, the firm has reported assets of $9 million, liabilities of $5 million, after-tax earnings of $2 million, and 750,000 outstanding shares of common stock.

a.   Calculate the earnings per share of Bozo Oil’s common stock. (p. 457).   2,000,000/750,000 = $2.67 per share.

 

b.   Assuming that a share of Bozo Oil’s common stock has a market value of $40, what is the firm’s price-earnings ratio? (p. 457).  40.00/2.67 = 14.98 = 15 P/E Ratio.

c.   Calculate the book value of a share of Bozo Oil’s common stock. (p. 461).   9,000,000-5,000,000/750,000 = $5.33 per share.

 

 

4.  Determining Interest and Approximate Bond Value. Assume that three years ago, you purchased a

corporate bond that pays 9.5 percent. The purchase price was $1,000. Also assume that three years after your bond investment, comparable bonds are paying 8 percent.

 

a.   What is the annual dollar amount of interest that you will receive from your bond investment?  The annual interest is $95.  $1,000  9.5 percent = $95.

 

b.   Assuming that comparable bonds are paying 8 percent, what is the approximate dollar price for which you could sell your bond?  The approximate dollar price would be $1,187.50.  $95 annual interest ÷ 8 percent = $1,187.50 approximate.

 

c.   In your own words, explain why your bond increased or decreased in value. This bond increased in value because you owned a bond with a fixed interest rate of 9.5 percent during a time period when interest rates in the economy were declining.

 

5.   Using Margin. Bill Campbell invested $4,000 and borrowed $4,000 to purchase shares in Wal-Mart. At the time of investment, Wal-Mart was selling for $45 a share.

 

a.   If Bill paid $30 commission, how many shares could Bill buy if he used only his own money and did not use margin?  $4,000 – $30 commission = $3,970.  $3,970 ÷ $45 a share = 88.2 shares.

b.   If Bill paid $50 commission, how many shares could Bill buy if he used his $4,000 and borrowed $4,000 on margin to buy Wal-Mart stock?  $4,000 + $4,000 Margin = $8,000. $8,000 – $50 commission = $7,950 funds for investment after commission, $7,950 ÷ $45 a share = 176.7 shares.

c.   Assuming that Bill did use margin, paid $90 commission to sell his stock, and sold his Wal-Mart stock for $53, how much profit did he make on his Wal-Mart investment? $53 price per share when sold – $45 per share purchase price = $8 per share profit.

$8 per share profit  176.7 number of shares using margin = $1,413.60 profit.  $1,413.60 – $90 commission = $1,323.60 total profit after commissions.

 

6.    Calculating yields. Assume you purchased a corporate bond at its current market price of $850 on January 2, 2002. It pays 9 percent interest and it will mature on December 31, 2011, at which time the corporation will pay you the face value of $1,000.

 

a.   Determine the current yield on your bond investment at the time of purchase.  The current yield = $90 ÷ $850 = 10.6 percent.

 

b.   Determine the yield to maturity on your bond investment.  Yield to maturity = 11.4 percent.

 

 

0

MINNETONKA WAREHOUSE

CASE 10-2 MINNETONKA WAREHOUSE

Question 1: For each of the four work team sizes, calculate the expected number of trucks in the queue waiting to be unloaded.

Size of team

Number of trucks in queue

2

3.2

3

.5

4

.27

5

.12

Question 2: For each of the four work team sizes, calculate the expected time in the queue—that is, the expected time a truck has to wait in line to be unloaded.

Size of team

Expected time in queue

2

.8 hours

3

.125 hours

4

.067 hours

5

.030 hours

Question 3: For each of the four work team sizes, what is the probability that a truck cannot be unloaded immediately?

Size of team

Probability that truck must

wait upon arrival

2

80%

3

50%

4

40%

5

30%

Question 4: Which of the four work teams has the lowest cost to Wayne?

Size of team

Total cost

2

$268.00

3

$102.00

4

$96.00

5

$95.32

Question 5: Wayne is also considering rental of a forklift to use in truck unloading. A team of only two would be needed, but the hourly cost would be $38 per hour ($28 for the workers and $10 for the forklift). They could unload a truck in five minutes. Should Wayne rent the forklift?

A two-person crew and a forklift will cost $38 per hour. Compare this with the answers in question 4; Wayne should adopt a two-man crew and use a forklift.

Question 6: Disregard your answer to question 5. Labor negotiations are coming up and Wayne thinks he can get the union to give way on the work rule that prohibits warehouse workers on the unloading dock from being given other assignments when they are not unloading trucks. How much would Wayne save in unloading dock costs if he could reassign warehouse workers to other tasks when they are not unloading trucks, assuming that he has picked a good team of workers and each worker works 8 hours a day?

From the printouts, we must determine how much “idle time” there is with the present system. This depends in part upon the crew size. For a crew of four, for example, 24 minutes per hour is spent unloading trucks and the rest is idle time. Therefore, Wayne could get 36 minutes of work per hour of work elsewhere out of each worker. At $14 per hour, this is worth $8.40 ($14/hr times .6 hours). In theory, he could save up to $8.40 per worker per hour assuming he could assign them to other tasks where the pay rates were the same.

 

0

ACCT 346

ACCT 346
Student Name
Bravo Baking Company began operations in May of 2010 with the production and sales of speciality breads.
The company has experienced a good market demand for its high protein, low carbohydrate product called “Hi-Lo”
Hi-Lo’s success has required that Bravo continue to make only this one product, however, Bravo’s customers,
the local retailers, have been asking for more specialty breads from the company. The decision to expand will be made
in the coming weeks.

Weekly Assignments: Complete the assigned Tab each week.
In each worksheet there are several Green colored cells. These cells must be filled in with your response.

Tab1) Product vs. Period Costs
Tab 2) Cost of Goods Manufactured Schedule
Tab 3) Break Even Analysis
Tab 4) Incremental Analysis
Tab 5) Capital Budgeting
Tab 6) Variance Analysis

Points Points
Due Available Earned
Week 1
10
10.00
Week 2
30
30.00
Week 3
40
40.00
Week 5
40
40.00
Week 6
40
40.00
Week 7
40
40.00
200
200.00 Total

ACCT 346
Student Name

For Tables A : From the list below, identify if the cost item is a
For Table B: From the list below, identify if the cost item is a
“Product Cost” or “Period Cost” by typing “Product” or “Period”
“Direct Cost” or “Indirect Cost” by typing “Direct” or “Indirect” in
in the appropriate box.
10 points the appropriate box.

Table A

Flour used in baking bread
Factory Supervisor Salaries
Bakers wages
Rent for Executive Offices
Sales Commissions
Utilities used in the factory
Advertising costs
Delivery truck costs
Paper wrappers for bread
Depreciation on bake ovens
Eggs, salt, water used for baking
Interest on bank loan
Factory Insurance

Enter either “Product” or “Period”
Product
Product
Product
Period
Period
Product
Period
Period
Product
Product
Product
Period
Product

Table B

Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct

Flour used in baking bread
Factory Supervisor Salaries
Bakers wages
Factory Insurance
Rent for Factory
Utilities used in the factory
Cleaning Bake Ovens
Insurance on Factory
Paper wrappers for bread
Depreciation on bake ovens
Eggs used for baking
Small amounts of salt used
Factory Insurance

Enter either “Direct” or “Indirect”
Direct
Correct
Indirect
Correct
Direct
Correct
Indirect
Correct
Indirect
Correct
Indirect
Correct
Indirect
Correct
Indirect
Correct
Direct
Correct
Indirect
Correct
Direct
Correct
Indirect
Correct
Indirect
Correct

Points

10.00

ACCT 346
Student Name

Use the information provided below to prepare the Cost of Good Manufactured Schedule:Bravo had the following costs as of Dec 31, 2010. Enter the correct
values in the Green shaded cells.
(TCO 2)

Table C

Materials used in baking bread
Factory Supervisor Salaries
Bakers wages
Rent for Executive Offices
Sales Commissions
Utilities used in the factory
Advertising costs
Delivery truck costs
Depreciation on bake ovens
Interest on bank loan
Beginning Inventory Materials
Beginning Work in Process
Ending Inventory Materials
Inventory Purchases
Ending Work in Process
Other Overhead costs
Beginning Finished Goods Inventory
Ending Finished Goods Inventory
Rent for Factory

30 points

32,000

Correct

20,000

$32,000

36,000

10000

5000

12000

25000

500

250

10,000

8000

4000
26000

2500

1200

7500

6000
7500

Cost of Goods Manufactured Schedule
Beginning Work In Process
$8,000
Materials
Beginning Inventory Materials
$10,000 Correct
Plus: Purchases
$26,000 Correct
Materials Available
$36,000 Correct
Less: Ending Inventory Materials
$4,000 Correct
Materials Used
$32,000 Correct
Direct Labor
$32,000 Correct
Overhead
Factory Rent
$7,500 Correct
Depreciation on bake ovens
$500 Correct
Utilities used in Factory
$5,000 Correct
Other Overhead costs
$1,200 Correct
Total Overhead
$14,200 Correct
Total Manufacturing Costs
$78,200
Total Work in Process
$86,200
Less: Ending Work in Process
$2,500
Cost of Goods Manufactured
$83,700

Complete only the Green cells. Values in Red are from the schedule above.
Cost of Goods Sold Schedule
Beginning Finished Goods Inventory
$7,500 Correct
Beginning Work In Process
$8,000 Correct
Materials
Beginning Inventory Materials
$10,000 Correct
Plus: Purchases
$26,000 Correct
Materials Available
$36,000 Correct
Less: Ending Inventory Materials
$4,000 Correct
Materials Used
$32,000 Correct
Direct Labor
$32,000 Correct

Correct

Correct
Correct
Correct
Correct

Overhead
Factory Rent
Depreciation on bake ovens
Utilities used in Factory
Other Overhead costs
Total Overhead
Total Manufacturing Costs
Total Work in Process
Less: Ending Work in Process
Cost of Goods Manufactured
Goods Available for Sale
Less: Ending Finished Goods Inventory
Cost of Goods Sold Schedule

$7,500 Correct

$500 Correct
$5,000 Correct
$1,200 Correct
$14,200 Correct
$78,200
$86,200
$2,500
$83,700

Correct
Correct
Correct
Correct

$91,200 Correct
$6,000 Correct
$85,200 Correct

Points

30.00

ACCT 346
Student Name

Bravo Baking identified the costs below to determine its cost of one unit of product and its monthly operating costs. (TCO 4)
40 Points
Units produced
14,000
Part I Enter your solution in the green cells for each of the following:

Table A

Materials used in baking bread
Factory Supervisor Salaries
Bakers wages
Rent for Executive Offices
Sales Commissions
Utilities used in the factory
Advertising costs
Delivery truck depreciation
Depreciation on bake ovens
Interest on bank loan

Total Costs

Price Charged per unit

Variable Fixed

2.29

0.12

2.29

3193.92 Correct .00
1

25200.00 Correct .00
1

2.63 Correct .00
1
0.33 Correct .00
1

0.50

0.07

3,000
3500

1000
400

500

$8,400.00

Using the costs from Table A compute
A) Breakeven units (rounded to 2 decimal places)
B) Break-even sales dollars
C) Contribution Margin
D) Contribution Margin Ratio (%)

Part II Complete the following requirements
A) If Bravo requires a profit of $5,000 how many units must it sell?
B) What is the total revenue from A above?
C) If Bravo actually sells 8,000 units
1) What is the margin of safety in Dollars?
2) What is the margin of safety percentage?

5095.06 Correct .00
1
40200.00 Correct .00
1

37920.00 Correct .00
1
0.60 Correct .00
1

$5.26

$7.89

Total Correct

Hint: use spreadsheet formulas to compute your answers

Points

40
8.00

ACCT 346
Student Name

Bravo Baking Co has expanded its product line to include several other specialty breads. The operating results for the last quarter are provided below. 40 Points
(TCO 7)

Product
Hi-Lo
Whole Grain Fruit & Nuts Total
Revenues
$67,575
$31,800
$15,900 $115,275
Variable product costs
$27,030
$12,720
$6,360 $46,110
Variable Selling & Administrative costs $13,515
$6,360
$3,180 $23,055
Contribution Margin
$27,030
$12,720
$6,360 $46,110
Fixed Product Costs
$5,000
$5,000
$5,000 $15,000
Fixed Selling and Administrative Costs
$5,700
$2,850
$2,850 $11,400
Allocated Common Costs
$5,000
$2,500
$2,500 $10,000

Net Income

$11,330

$2,370

-$3,990

$9,710

Required:

Bravo wants to know the effect on Net Income if it decides to discontinue the Fruit & Nuts product.
If Bravo eliminates Fruit & Nuts 50% of fixed costs can be avoided.
Prepare and incremental analysis showing the Net Income Effect of eliminating the Fruit & Nuts product.
What woud you advise Bravo to do?
Using the Table below, compute the Net Income for Bravo Baking after eliminating the Fruit & Nuts product.
Product
Hi-Lo
Whole Grain Fruit & Nuts Total
Revenues
$67,575
$31,800
$0 $99,375 Correct
Variable product costs
$27,030
$12,720
$0 $39,750 Correct

Variable Selling & Administrative costs
Contribution Margin
Fixed Product Costs
Fixed Selling and Administrative Costs

Allocated Common Costs

Net Income

$13,515
$27,030
$5,000
$5,700

$5,000

$11,330

$6,360
$12,720
$7,500
$4,275

$3,750

-$2,805

$0
$0
$0
$0

$19,875
$39,750
$12,500
$9,975

$0

$0

Correct
Correct
Correct
Correct

$8,750 Correct

$8,525 Correct

Points

40

ACCT 346
Student Name

Bravo Baking Co is considering replacing an older freezer with a larger unit to freeze some of its bread.
The new unit has a larger capacity and Bravo estimates it can produce and sell an more bread each year. From these additional sales
the after tax cash flow is expected to be $4,000. In addition to more sales, the new freezer will save $1,200 in electricity each year.
However, the new freezer will cost an additional $2,000 each year for maintenance. The cost of the new unit is $25,000 and it is
expected to last 10 years. The salvage value at the end of its life is $6,000. The old unit is fully depreciated and can be disposed at cost.
Determine the Net Present Value of purchasing the new freezer using a required rate of return of 14%. Should Bravo purchase the freezer?

Use the format below to complete the NPV computations:

(Note: Use PV Tables on pages 342 and 343. Also, be sure to show costs as negative values)

TCO 9
40 Points

Cost of new refrigeration unit
After tax cash flow
Annual electricity savings
Additional annual maintenance costs
Amount collected from disposal of unit
Net present value

Cash
Flow

-25000

4000

1200
-2000

6000

PV
Factors

5.2161 Correct

5.2161 Correct
5.2161 Correct

0.2697 Correct

PV
Amounts

-25,000 Correct

20864.4 Correct

6259.32 Correct
-10432.2 Correct

1618.2 Correct

-6690.28 Correct

Points

40

ACCT 346
Student Name

Bravo Baking uses standard costing to analyze its performance. The data below is provided for your use in determining Bravo’s variances.
Standard Cost per unit
Cost /Unit
Amount/Unit Standard Cost
Material Cost (Ingredients) (.5 lbs)
2.29
.5 lbs
$4.58
Direct Labor( .25 hrs * $9/hr)
2.25
.25 hrs
$9.00
Overhead
0.57
Total
5.11

During the month, Bravo sold 9,000 loaves of bread and used 4,650 pounds of ingredients. Also during the month, Bravo
purchased 5,000 pounds of ingredients at a cost of $22,500. Employees worked a total of 2200 hours and actual labor costs were $19,998

TCO 10

40 Points

Required:
Part a. Compute the material price and quantity variance.

Material Price Variance =

*

5,000.00
Fav

Material Quantity Variance =

4,500.00 )

*

4.58

Unf

Labor Rate Variance =

$9.00

)

*

2,200.00
Unf

Labor Efficiency Variance =


4.50
(400.00) Fav/Unf >

=

(

=

Correct

( 4,650.00

=

=

$687.00

Correct

9.09
200.00

=

(

=

Correct

( 2,200.00


($450.00) Fav/Unf

=

=

$4.58

)

Correct

Fav/Unf

Correct

Fav/Unf >

Correct

2,250.00 )

*

9.00

Fav

Correct

Correct

Points

40