The Ocobee River Rafting Company
Vicki Smith, Penny Miller, and Darryl Davis are students at
State University. In the summer, they often go rafting with other students down
the Ocobee River in the nearby Blue Ridge Mountain foothills. The river has a
number of minor rapids but is not generally dangerous. The students’ rafts
basically consist of large rubber tubes, sometimes joined together with ski
rope. They have noticed that a number of students who come to the river don’t
have rubber rafts and often ask to borrow theirs, which can be very annoying.
In discussing this nuisance, it occurred to Vicki, Penny, and Darryl that the
problem might provide an opportunity to make some extra money. They considered
starting a new enterprise, the Ocobee River Rafting Company, to sell rubber rafts
at the river. They determined that their initial investment would be about
$3,000 to rent a small parcel of land next to the river on which to make and
sell the rafts; to purchase a tent to operate out of; and to buy some small
equipment such as air pumps and a rope cutter. They estimated that the labor
and material cost per raft will be about $12, including the purchase and
shipping costs for the rubber tubes and rope. They plan to sell the rafts for
$20 apiece, which they think is about the maximum price students will pay for a
preassembled raft.
Soon after they determined these cost estimates, the newly
formed company learned about another rafting company in North Carolina that was
doing essentially what they planned to do. Vicki got in touch with one of the
operators of that company, and he told her the company would be willing to
supply rafts to the Ocobee River Rafting Company for an initial fixed fee of
$9,000 plus $8Â per raft, including shipping. (The Ocobee River Rafting
Company would still have to rent the parcel of riverside land and tent for
$1,000.) The rafts would already be inflated and assembled. This alternative
appealed to Vicki, Penny, and Darryl because it would reduce the amount of time
they would have to work pumping up the tubes and putting the rafts together,
and it would increase time for their schoolwork.
Although the students prefer the alternative of purchasing
the rafts from the North Carolina company, they are concerned about the large
initial cost and worried about whether they will lose money. Of course, Vicki,
Penny, and Darryl realize that their profit, if any, will be determined by how
many rafts they sell. As such, they believe that they first need to determine
how many rafts they must sell with each alternative in order to make a profit
and which alternative would be best given different levels of demand.
Furthermore, Penny has conducted a brief sample survey of people at the river
and estimates that demand for rafts for the summer will be around 1,000 rafts.
Perform an analysis for the Ocobee River Rafting Company to
determine which alternative would be best for different levels of demand.
Indicate which alternative should be selected if demand is approximately 1,000
rafts and how much profit the company would make.