Problem 16-01
Inventory Management
Williams & Sons last year reported sales of $128 million, cost of goods sold (COGS) of $105 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 7 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.
Here, Given information:
Sales is $ 128 million
Cost of goods sold (COGS) is $ 105 million
Existing system:
Inventory turnover ratio is 5
COGS/ Average inventory = 5
Inventory = COGS / 5
Inventory = 105/5
Inventory is $ 21 million
New system:
Inventory turnover ratio is 7 (others - constant)
COGS / Average inventory = 7
Inventory = COGS/ 7
Inventory = 105/7
Inventory is $ 15 million
Free up cash:
Difference between cash spent for inventory in both systems
= Existing system - New system.
= 21- 15
= $ 6 million.
Problem 16-01 Inventory Management Williams & Sons last year reported sales of $128 million, cost of...
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