Operations “A” 8 marks
5(a)Explain two reasons why working capital is important to MCGG.
Reason 1: Needed to pay day-to-day expenses
Explanation: as MCGG will need to pay personal trainers and maintenance on the old gym equipment.
If there is insufficient working capital then it will be difficult for MCGG to continue trading because without wages paid gym equipment available MCGG cannot continue operating.
Reason 2: Holding too much inventory.
Explanation: If MCGG has a high level of working capital tied up in inventory like t-shirts and vitamins, this capital could be used more effectively in other activities like promotion or personal trainers’ bonuses, so opportunities to gain profit are missed.
Operations “B” 12 marks
5(b) Consider the weekly forecasts in Appendix 2 for the two additional services Conor could
choose:
- ice bath
- sports massage
Include a calculation of profit for the two services in your response.
Which additional service should Conor choose to offer? Justify your answer.
Ice Bath: : Gross Profit = $2940 Profit = $1500
Gross Profit Margin = 98% Profit Margin = 50%
Ice Bath has lower gross profit and profit, but it’s gross profit margin and profit margin are higher.
Sports Massage: Gross Profit = $3025 Profit = $1625
Gross Profit Margin = 95% Profit Margin = 44%
Sports massages have higher gross profit and profit, but it’s gross profit margin and profit margin are lower than the ice bath.
Recommendation: Although sports massages have higher profit in absolute terms, ice baths have a higher GPM and profit margin so higher profitability. This means that in the long term if MCGG increases their sales the sports massage will be more profitable as it will make more profit from every $ of sales.
