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Williams & Sons last year reported sales of $73 million, cost of goods sold (COGS) of...

Williams & Sons last year reported sales of $73 million, cost of goods sold (COGS) of $60 and an inventory turnover ratio of 5. 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 6 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.

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Answer #1

The amount is computed as shown below:

Old value of inventory is computed as follows:

= COGS / Inventory turnover ratio

= $ 60 million / 5

= $ 12 million

New value of inventory is computed as follows:

= COGS / Inventory turnover ratio

= $ 60 million / 6

= $ 10 million

So, the amount of cash freed up will be as follows:

= $ 12 million - $ 10 million

= $ 2 million or $ 2,000,000

Feel free to ask in case of any query relating to this question      

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