The Ocobee River Rafting Company
Vicki Smith, Penny Miller, and Darryl Davis are students atState University. In the summer, they often go rafting with other students downthe Ocobee River in the nearby Blue Ridge Mountain foothills. The river has anumber of minor rapids but is not generally dangerous. The students’ raftsbasically consist of large rubber tubes, sometimes joined together with skirope. They have noticed that a number of students who come to the river don’thave 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 theproblem might provide an opportunity to make some extra money. They consideredstarting a new enterprise, the Ocobee River Rafting Company, to sell rubber raftsat 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 andsell the rafts; to purchase a tent to operate out of; and to buy some smallequipment such as air pumps and a rope cutter. They estimated that the laborand material cost per raft will be about $12, including the purchase andshipping 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 apreassembled raft.
Soon after they determined these cost estimates, the newlyformed company learned about another rafting company in North Carolina that wasdoing essentially what they planned to do. Vicki got in touch with one of theoperators of that company, and he told her the company would be willing tosupply rafts to the Ocobee River Rafting Company for an initial fixed fee of$9,000 plus $8 per raft, including shipping. (The Ocobee River RaftingCompany would still have to rent the parcel of riverside land and tent for$1,000.) The rafts would already be inflated and assembled. This alternativeappealed to Vicki, Penny, and Darryl because it would reduce the amount of timethey 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 purchasingthe rafts from the North Carolina company, they are concerned about the largeinitial 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 howmany rafts they sell. As such, they believe that they first need to determinehow many rafts they must sell with each alternative in order to make a profitand which alternative would be best given different levels of demand.Furthermore, Penny has conducted a brief sample survey of people at the riverand estimates that demand for rafts for the summer will be around 1,000 rafts.
Perform an analysis for the Ocobee River Rafting Company todetermine which alternative would be best for different levels of demand.Indicate which alternative should be selected if demand is approximately 1,000rafts and how much profit the company would make.