JillJoe Trails is a family camp located in national park, New Mexico. Open from

Question

JillJoe Trails is a family camp located in national park, New Mexico. Open from mid-May to Labor Day. It offers week-long family summer vacation packages that includes lodging, meals and numerous activities such as horseback riding, water skiing, sailing, canoeing, archery, etc. To provide families with a restful experience, it limits the number of families to 20 per week.

JillJoe Trails is planning on adding another activity to their repertoire: rafting. Mangers are currently trying to decide whether to offer patrons this service via a local company, Trio Tours, or to provide the service in house. If JillJoe Trails provides its own rafting tours, then managers estimate that annual fixed cost will increase by $40,000 and that they will earn $0.60 on each dollar of rafting revenue (i.e. one dollar sale with 0.4 variable cost and 0.6 contribution margin). On the other hand, if JillJoe Trails routes patrons to Trio Tours, JillJoe Trails will receive $0.20 for each rafting revenue. JillJoe Trails expect the rafting revenue to be the same regardless.

Required:

1. Suppose JillJoe Trails expects rafting revenue to be $75,000 per year, what decision should JillJoe Trails make? What if the revenue is expected to be $125,000?

2. What would be the revenue at which JillJoe Trails would be indifferent between the two options?

3. What other factors should JillJoe Trails consider in making its decisions?

Explanation / Answer

1.

With rafting revenue $75000, JillJoe should offer it through Trio Tours since it would result in a higher operating income of $15000. However, with rafting revenue $125000, it should be provided in-house since the net operating income would be higher at $35000.

2. JillJoe Trails would be indifferent between the two options at revenue of $100000

Cost indifference = Differential fixed cost / Differential variable cost = ($40000 - $0) / ($0.80 - $0.40) = $40000 / $0.40 = $100000

3. JillJoe Trails should also consider the quality and timeliness of the services provided by Trio Tours before making its decision.

With Revenue $75000 With Revenue $125000 In-house Trio Tours In-house Trio Tours Rafting Revenue 75000 75000 125000 125000 Contribution margin 45000 15000 75000 25000 ($75000 x 0.60) ($75000 x 0.20) ($125000 x 0.60) ($125000 x 0.20) Fixed costs 40000 0 40000 0 Net operating income 5000 15000 35000 25000

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