Williams & Sons last year reported sales of $16 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.

The company will feed up 3,000,000 in cash from the change in the inventory system.

Explanation:

COGS $12,000,000

Inventory Turnover: 2

COGS / Average Inventory = Inventory Turnover

$12,000,000 / Av. Inventory = 2

Av. Inventory $6,000,000

Currently the firm has 6,000,000 invested in inventory

If turnover increase to 4

$12,000,000 / Av. Inventory = 4

Av. inventory = 3,000,000

Cash released from the decrease in the working capital:

6,000,000 - 3,000,000 = 3,000,000

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