Reference no: EM133144523

Question - Charles River Company is a family camp located outside of Mississippi. They offer camping, hiking tours, horseback riding, and fishing expeditions in the summer months. They are considering adding white water rafting to their services. Management is currently trying to decide whether to offer their patrons this service via a local company, Rapid Rafting Co, or provide the tours 'in-house. If Charles provides its own rafting tours then management estimates the annual fixed costs will increase by $30,000 and that they will earn $0.65 on each dollar of white water rafting tour revenue (i.e., for every dollar of revenue $0.35 variable cost and $0.65 contribution margin). On the other hand, if they route patrons to Rapid Rafting Co, annual fixed costs will not increase and Rapid will pay Charles River $0.25 for each dollar of rafting tour revenue (for tours booked through Charles). Management of Charles expects demand for white water tours to be the same regardless of which option they choose.

Required -

a. Suppose Charles expects whitewater rafting revenue to be $65,000 per year. Should they outsource the whitewater tours or operate them internally? Would your decision change if the revenues were expected to be $115,000 per year?

b. What is the whitewater rafting revenue under which Charles is indifferent from a profit perspective.

c. What is the risk in the cost structure at each level of revenue ($65,000, 115,000 and part b. revenue)? Quantify that risk with a ratio.

d. What would you recommend? Include both quantitative and qualitative suggestions.