Haberdash inc. last year reported sales of $12 million and an inventory turnover ratio of 3. the company is now adopting a just-in-time inventory system. if the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 7.5, while maintaining the same level of sales, how much cash will be freed up?

Question

Business

Phillip Frederick

1 July, 10:34

Haberdash inc. last year reported sales of $12 million and an inventory turnover ratio of 3. the company is now adopting a just-in-time inventory system. if the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 7.5, while maintaining the same level of sales, how much cash will be freed up?

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Charlee Mccall · Answer 1

Sales = $12,000,000

Inventory Turnover ratio (old) = 3

Inventory Turnover ratio (new) = 7.5

Freed up Cash = ?

So, let’s find out the freed up cash

We know level of inventory are calculated as follows;

Inventory = Sales Inventory turnover ratio

Calculating $ value of old inventory

Inventory Old=$12,000.0003

= $7.5,000,000

Calculating $ value of New inventory

Inventory New=$12,000,0075

= $3,000,000

The freed up cash would be=Old Inventory - New Inventory

=$7.5,000,000 - $3,000,000

= $4.5,000,000