Williams & Sons last year reported sales of $17 million,cost of goods sold (COGS) of...

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 3 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

The amount is computed as shown below:

Current inventory is computed as follows:

= COGS / Inventory turnover ratio

= $ 12 million / 2

= $ 6 million

New level of inventory is computed as follows:

= COGS / Inventory turnover ratio

= $ 12 million / 3

= $ 4 million

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

= $ 6 million - $ 4 million

= $ 2,000,000

jeff jeffy answered 2 years ago

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