Reference no: EM133180499

Question - TaylorMade-Adidas Golf Company, a subsidiary of Adidas, manufactures golf clubs using "adjustable weight technology' or AWT. Suppose a European machine company has proposed to sell TaylorMade a new highly automated machine that would reduce significantly the labor cost of producing its golf clubs. The cost of the machine is $1,000,000, and would have an expected life of 5 years, at the end of which it would have a residual value of $100,000. It has an estimated operating cost of $10,000 per month. The direct labor cost savings per club from using the machine is estimated to be $5 per club. In addition, one monthly salaried manufacturing manager, whose salary is $6,000 per month would no longer be needed. Assume the Vice President of Manufacturing earns $10,000 per month. Also, the new machine would free up about 5,000 square feet of space from the displaced workers. Assume TaylorMade's building is held under a 10-year lease that has eight years remaining. The current lease cost is $1 per square foot per month. TaylorMade may be able to use the space for other purposes, and it has received an offer to rent it to a nearby related company for $3,500 per month.

1. Assuming the new machine would be used to produce an average of 5,000 clubs per month, show differential analysis of the relevant costs of buying the machine and using it for the next five years, versus continuing to use hand labor. Which would be the better option for TaylorMade to pursue?

2. In addition to the quantitative analysis, what qualitative considerations are important for making the right decision?