Question

In: Finance

Williams & Sons last year reported sales of $9 million, cost of goods sold (COGS) of...

Williams & Sons last year reported sales of $9 million, cost of goods sold (COGS) of $6 million, 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 3 while maintaining the same level of sales and COGS, how much cash will be freed up? Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $1.23 million should be entered as 1,230,000,000. Round your answer to the nearest dollar.

Solutions

Expert Solution

Inventory = Cost of goods sold  / Inventory turnover ratio

Inventory Old = $6,000,000 / 2 = $3,000,000

Inventory New = $6,000,000 / 3 = $2,000,000

The freed up cash would be = Old Inventory - New Inventory

The freed up cash would be = $3,000,000 - $2,000,000

The freed up cash would be = $1,000,000


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