Gulab Ltd is a newly incorporated company and it would like to purchase raw materials from domestic sources as well as from other countries under Letter of Credit (LC). On the basis of the following information, calculat

CS Professional · Corporate Funding & Listings in Stock Exchanges · PYQS · June 2022
Gulab Ltd is a newly incorporated company and it would like to purchase raw materials from domestic sources as well as from other countries under Letter of Credit (LC). On the basis of the following information, calculate the limit for Letter of Credit (LC) for the Financial Year 2021-22 : (i) Estimated Raw Material purchase for FY 2021-22 ₹240 crore (ii) Estimated purchase under Letter of Credit (LC) for FY 2021-22 (90%) ₹216 crore (iii) Of which import of Raw Material under Letter of Credit (30%) ₹64.80 crore (iv) Lead Time Domestic 1 Month Import 2 Months (v) Transit Time Domestic 1 Month Import 2 Months (vi) Credit (Usance) Period available Domestic 1 Month Import 4 Months

Answer & Explanation:

Calculation of Inland & Foreign Letter of Credit Limit of Gulab Ltd. for the Financial Year 2021-22 Annual Raw Material Consumption for FY 2021-22 A ₹240 crore Estimated purchase under Letter of Credit (LC) for FY 2021-22 (90%) B ₹216 crore Calculation of ILC* Calculation of FLC* Annual Raw Material Procurement through ILC/FLC C ₹151.20 crore ₹64.80 crore Monthly Consumption D ₹12.60 crore ₹5.40 crore Lead Time (Time from order placement to shipment) E 1 Month 2 Months Transit Time F 1 Month 2 Months Credit (Usance) Period Available G 1 Month 4 Months Total Period H=E+F+G 3 Months 8 Months LC limit Required for FY 2021-22 I=D*H ₹37.8 crore ₹43.2 crore * ILC = Inland Letter of Credit * FLC = Foreign Letter of Credit

Topics: Letter of Credit (LC)

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