The Ocobee River Rafting Company

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 Ocobee River in the nearby Blue Ridge Mountain foothills. The river has a number of minor rapids but is not generally dangerous. The student's 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 Vicky, 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 $3000 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 a piece, which they think is about the maximum price students will pay for the 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 had planned to do. Vicki got in touch with one for 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 or $9,000 plus $8 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 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 the demand for rafts for the summer will be around 1,000 rafts.

Questions?

1. Determine the break-even amounts (in rafts) for the two alternatives provided in the case study.
2. Determine the intersection amount of the two cost functions.
3. Based on demand, provide a recommendation on when to:
a. Use the first alternative
b. Use the second alternative
c. Not actually go into this business endeavor
4. Using 1,000 rafts as the given demand, estimate the profit for this new company.