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# 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). 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 -5days and custom clearance -2- days and local transportation -1- days. 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.

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

Calculation of L/C Limit Cash Basis Purchase (A) Lead time and effective credit period Limit Purchase X Lead time 360 days 300 Imported Raw material 600 60 600 X 60 360 = 100 (Rs. in lacs) Inland Raw material 300 30 300 X 30 360 = 25 1200

125

Calculation of Average holding period (1) 600 X 60 = 36000 300 X 30 = 9000 ----------900 45000 (2) Total purchase Less : Cash Purchase Credit purchase Rs. 1200 lacs Rs. 300 lacs Rs. 900 lacs

45000 900

= 50 days holdings

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