Question

Williams & Sons last year reported sales of $16 million, cost of goods sold (COGS) of $12 and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 4 while maintaining the same level of sales and COGS, how much cash will be freed up? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

The company will feed up 3,000,000 in cash from the change in the inventory system.

Step-by-step explanation:

COGS $12,000,000

Inventory Turnover: 2

COGS / Average Inventory = Inventory Turnover

$12,000,000 / Av. Inventory = 2

Av. Inventory $6,000,000

Currently the firm has 6,000,000 invested in inventory

If turnover increase to 4

$12,000,000 / Av. Inventory = 4

Av. inventory = 3,000,000

Cash released from the decrease in the working capital:

6,000,000 - 3,000,000 = 3,000,000