KRISTINE B.

TORRES MANAGEMENT SCIENCE- MGT 001

BSA 2-B ACTIVITY #1

CASE PROBLEM #1: 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 $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 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.
Questions:
1. Perform the steps in problem solving analysis for the Ocobee River Rafting Company to
determine which alternative would be best for different levels of demand.
2. Indicate which alternative should be selected if demand is approximately 1,000 rafts and
how much profit the company would make.

STEPS IN PROBLEM SOLVING ANALYSIS:

IDENTIFY THE PROBLEM:

The Ocobee River Rafting Company are torn between choosing what becomes more
beneficial when they started to create their own rafts production. They’ve come up with two
solutions for their business in mind but weighing out its outcome if it will supply the estimated
demands for their target customers on summer which is approximately 1,000 rafts.

IDENTIFY THE ALTERNATIVES:

The Ocobee River Rafting Company comes up with the two alternatives which would be
the best fits for the said business. The first one, is to have the initial investment that cost $3,000
dollars where this includes a rent expense for their place to produce and sell their rafts that also
includes the expenses of equipment to use such as air pump and a rope cutter. In this first
alternative they have, they’ve decided their selling price $20 per piece, which excludes another
expenses cost $12 for the labor and material cost, and also for the purchase of shipping cost for
the rubber tubes and rope.
On the other hand, by researching for their target demands, they found a rafting company
in North Carolina and one of them got a deal to become their supplier so it will be less hassle for
them. But since it’s a company, of course they will offer a much pricey for them to be profitable
more. They were offered with the fixed initial fee cost $9,000 plus an additional $8 per raft that
includes shipping but still needs to rent for parcel riverside land and tent which cost $1,000.
DETERMINE THE CRITERIA:
Both the alternatives has something to give for their business. But what must be best fit
for their business should be more beneficial for them, that gives more profit, less worries, and
can lead for their success. First, there must be an efficient fund for them to decide. Second, the
target demand must be fulfilled. And lastly, it must be more profit than expenses.
EVALUATE THE ALTERNATIVES:
ALTERNATIVE 1:
Let the:
𝐶𝑓 = $3,000

𝑃 = $20
𝐶𝑣 = $12
𝐶𝑓 3,000
𝑣1 = 𝑃− 𝐶 = 20−12 = 375 rafts
𝑣

ALTERNATIVE 2:
Let the:
𝐶𝑓 = $10,000

𝑃 = $20
𝐶𝑣 = $8
𝐶𝑓 10,000
𝑣1 = 𝑃− 𝐶 = = 833.37 rafts
𝑣 20−8

CHOOSE AN ALTERNATIVE:
On the solution above, it shown the possible rafts to be produce between the
Alternative 1 and Alternative 2. But the factors must be considered:

 The three students should not proceed into a river rafting business if the demand is less
than 375 rafts.
 Alternative 2 should not be chosen if there is a demand for fewer than 833 rafts;
alternative 1 should be used if there is an expectation that demand will range from 375
to 833 rafts.
 Which option is preferable in the event that the demand is higher than 833 rafts? To
find the answer, you will need to equate the two cost functions.
3,000 + 12𝑣 = 10,000 + 8𝑣
4𝑣 = 7,000
𝑽 = 1,750
The value of 1,750 is considered to be the "point of indifference" between the two
possibilities. In general, for demand that is lower than this point, the option that has the lowest
variable cost should be selected as the best choice.
IMPLEMENT THE DECISION:
In order for the Ocobee River Rafting Company to determine which of the available
options they will go with, we suggest that the following recommendations be taken into
consideration:
demand < 375 do not start business
375 < demand < 1,750 select alternative 1
demand > 1,750 select alternative 2

Due to the fact that Penny Miller carried out a brief sample survey, and on the basis of
the results, she was able to come up with an estimation that the demand will be approximately
one thousand rafts. Therefore, OPTION 1 should be chosen as the best option.

EVALUATE THE RESULT:

By going with Alternative 1, the Ocobee River Rafting Company will be able to bring in a $5,000
in revenue as shown below;
Z = 𝑣𝑝 − 𝑐𝑓 − 𝑣𝑐𝑣

= (1,000) (20) − 3,000 − (1,000) (12)

Z = $5,000