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Williams & Sons last year reported sales of $127 million, cost of goods sold (COGS) of $105 and an inventory turnover ratio of 5
Williams & Sons last year reported sales of $127 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
Expert Solution
Computation freed up cash:-
Old inventory = Cost of goods sold / Old inventory turnover ratio
= $105 / 5
= $21 million
New inventory = Cost of goods sold / New inventory turnover ratio
= $105 / 7
= $15 million
Freed up cash = Old Inventory - New Inventory
= $21 - $15
= $6 million
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