Jackrabbit Trails is a family camp located in Kings Canyon National Park, California. Open from mid-May to Labor Day, Jackrabbit Trails offers week-long family summer vacation packages that include lodging, three meals a day, and numerous activities such as horseback riding, waterskiing, sailing, canoeing, archery, fishing, hiking, and mountain biking. To provide families with a restful experience, Jackrabbit Trails limits the number of families to 20 per week. Moreover, the camp motto is "Follow the fun without following the herd."

Jackrabbit Trails is planning on adding another activity to their repertoire-whitewater rafting. Management currently is trying to decide whether to offer patrons this service via a local company, Tributary Tours, or to provide the service "in house." If Jackrabbit Trails provides its own whitewater rafting tours, then management estimates that annual fixed costs will increase by $40,000 and that they will earn $0.60 on each dollar of whitewater rafting tour revenue (i.e., for every dollar of whitewater rafting revenue, there would be $0.40 in variable costs and $0.60 in contribution margin). On the other hand, if Jackrabbit Trails routes patrons to Tributary Tours for their whitewater rafting experience, annual fixed costs will not increase and Tributary Tours will pay Jackrabbit Trails $0.20 for each dollar of whitewater rafting tour revenue (that is, for tours booked through Jackrabbit trails). Management of Jackrabbit Trails expects gross whitewater rafting revenues to be the same under either scenario.

Required:

a. Suppose Jackrabbit Trails expects whitewater rafting revenue to be $75,000 per year.

Should management outsource the whitewater rafting tours or operate them internally? Would your decision change if revenues were expected to be $125,000 per year?

b. What is the whitewater rafting revenue at which Jackrabbit Trails is indifferent (i.e., has the same profit) between its two choices?

c. What other factors should Jackrabbit Trails consider in making its decision?