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Inventory Management Williams & Sons last year reported sales of $17 million, cost of goods sold...

Inventory Management Williams & Sons last year reported sales of $17 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.

Expert Solution

> Concept

Inventory turnover ratio (ITR) is an activity ratio and is a tool to evaluate the liquidity of company’s inventory.
It measures how many times a company has sold and replaced its inventory during a certain period of time.

> Formula

ITR = Cost of good sold / Average inventory

> Calculation

Under old inventory system

ITR = Cost of good sold / Average inventory

=> 2 = 12 Mn / Average inventory

=> Average inventory = 12 Mn / 2

=> Average inventory = $ 6 Mn

Under new inventory system

ITR = Cost of good sold / Average inventory

=> 4 = 12 Mn / Average inventory

=> Average inventory = 12 Mn / 4

=> Average inventory = $ 3 Mn

Cash Release under new system

Cash release = Inventory under old system - Inventory under new system

= 6 Mn - 3 Mn

= $ 3 Mn Answer

Hope you understand the solution.

jeff jeffy answered 1 year ago

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