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Inventory Ratio and Working Capital

Business Depot consistently sells $20,000,000 (Cost of Goods Sold) in office supplies each year. Their inventory turnover ratio has be 2 for the past few years. A new CFO with extensive industry experience has recommended a new Inventory Control System that promises to increase the inventory turnover ratio to 4 at the same level of sales. How much working capital will be freed up?

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Inventory ratio = cost of goods sold/inventory

Cos of goods sold = ...

Solution Summary

This solution calculates the initial and final inventory ratio to estimate the change in working capital.