Williams & Sons last year reported sales of $26 million, cost of goods sold (COGS) of $20 million, and an inventory turnover ratio of 4. 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 5 while maintaining the same level of sales and COGS, how much cash will be freed up?
Inventory Management
Williams & Sons last year reported sales of $26 million, cost of goods sold (COGS) of $20 million, and an inventory turnover ratio of 4. 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 5 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.
$
Cost of Goods Sold = $20 million.
Inventory turnover ratio = 4
Inventory turnover ratio= COGS/Inventory
So, inventory= COGS/Inventory turnover ratio
Inventory= $20 million/4 = $5 million
The amount of inventory under old system is $5 million.
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