The Backwoods American company in Problem 2.1 produces approximately 20,000 parkas annually. The quality management program the company implemented was able to improve the average percentage of good parkas produced by 2% each year, beginning with 83% good-quality parkas in 2012. Only about 20% of poor-quality parkas can be reworked. Total (not per parka) direct manufacturing cost is given below:

Year 2003 2004 2005 2006 2007

Direct Manufacturing Cost $420,900 $423,400 $424,700 $436,100 $435,500

A) Compute the product yield for each of the five years.

B) Using a rework cost of $12 per parka, determine the manufacturing cost per good parka for each of the five years. What you can you conclude about the improvement process?

a.  2003 product yield = 20,000(0.83) + 20,000 (1 - 0.83)(0.20)

= 16,600 + 680

= 17,280 parkas

2004 product yield = 20,000*(0.85) + 20,000*(0.15)(0.20)

= 17,000 + 600

= 17,600 parkas

2005 product yield =  20,000*(0.87) + 20,000*(0.13)(0.20)

= 17,400 + 520

= 17,920 parkas

2006 product yield = 20,000*(0.89) + 20,000*(0.11)(0.20)

= 17,800 + 440

= 18,240 parkas

2007 product yield = 20,000*(0.91) + 20,000*(0.09)(0.20)

= 18,200 + 360

= 18,560 parkas

b. 2003 manufacturing cost per good parka = 420,900 + 12*(20,000)(0.17)(0.20) /17,280

= 420,900 + 12 (680) / 17,280

= 429,060 /17,280

= $24.83

2004 manufacturing cost per good parka =  423,400 + 12*(600) /17,600

= 430,600 /17,600

= $24.47

2005 manufacturing cost per good parka = 424,700 + 12*(520) / 17,920

= 430,940 /17,920

= $24.05

2006 manufacturing cost per good parka =  436,100 + 12*(440) / 18,240

= 441,380 /18,240

= $24.20

2007 manufacturing cost per good parka =  435,500 + 12 *(360) /18,560

= 439,820 / 18,560

= $23.70

explanation:

the contractual interest rate is the interest the borrower must pay and the interest the lender receives, or more simply, it is the interest rate stated on a bond whereas the market interest rate is “the investors demand for loaning funds”. therefore, bonds can either be sold at a premium, face value, or discount.

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