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Last year a company reported  a sale to USD 8million and inventory turnover ratio of 4. Its...

Last year a company reported  a sale to USD 8million and inventory turnover ratio of 4.

Its is now optin a new inventory  system is able to reduce the firms inventory level and increase the firms inventory turnover ratio to 6 while maintaining the same level of sales. How much cash will be freed up.

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Answer #1

Inventory = Sales / Inventory turnover ratio

.

Inventory before the new inventory system = $8M/4

= $2M

.

Inventory after the new inventory system = $8M/6

= $1.33M

.

Cash freed up = $2M - $1.33M

.

Cash freed up = $0.67M (Amount blocked in Inventory is reduced after implementation of new inventory system)

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