Case Study of Letter of Credit

A company has requested for Inland / Import Letter of Credit (DP / DA -60- days) limit of Rs.150 lacs and furnished following additional information :

1. Purhcase Rs.1200 lacs for full year. Out of which Rs.300 lacs cash purchases from domestic market, Rs.600 lacs imported raw material against L/C (DP/DA), inland raw material of Rs.300 lacs against L/C (DP/DA).

2. Overseas supplier agreed to extend credit period of -60- days and will dispatch the goods on 2ndh day on receipt of L/C, Voyage time -5- days and custom clearance -2- days and local transportation -1- days.

3. Domestic supplier agreed to extend credit period of -30- days and will dispatch the goods on 2nd day on receipt of L/C.

Please furnish following :-

Import L/C limit. Inland L/C limit. Total combined L/C limit How much amount of sundry creditors level required to be

estimated in CMA data. How much number of days of holding level of sundry creditors

required to be estimated in CMA data. Margin stipulation is 25%. How much margin required to be

estimated in CMA data.

Note : Consider -360- days for -1- year for the calculation purpose

Calculation of L/C Limit

(Rs. in lacs)Cash Basis

Imported Raw

material

Inland Raw material

Purchase (A) 300 600 300 1200Lead time and effective credit period

- 60 30

Limit Purchase X Lead time 360 days

600 X 60360

= 100

300 X 30360= 25 125

Calculation of Average holding period

(1)600 X 60 = 36000300 X 30 = 9000----- -------900 45000 = 45000 = 50 days holdings 900(2) Total purchase Rs. 1200 lacs Less : Cash Purchase Rs. 300 lacs Credit purchase Rs. 900 lacs

Minimum Sundry Creditors requirement X 360 = 125 X 360 Credit purchase 900 = 50 days

Margin requirement to estimated in CMA

25 % on Rs.125 lacs = Rs. 31.25 lacs

Against FDR with Bank under head of Current Assets