On the basis of following information, calculate the limit for Letter of Credit (LC) for the Financial Year 2019-20 of M/s Madhukar Enterprises: (i) Estimated Raw Material purchase for the FY 2019-20: ₹ 172.64 Crore (ii)

CS Professional · Corporate Funding & Listings in Stock Exchanges · PYQS · December 2019
On the basis of following information, calculate the limit for Letter of Credit (LC) for the Financial Year 2019-20 of M/s Madhukar Enterprises: (i) Estimated Raw Material purchase for the FY 2019-20: ₹ 172.64 Crore (ii) Estimated purchase under Letter of Credit for FY 2019-20 (LC): ₹ 69.41 Crore (iii) Lead time i.e. time from order placement to shipment: 10 days (iv) Transit Time: 20 days (v) Credit (Usance) Period available: 3 months

Answer & Explanation:

Calculation of Limit for Letter of Credit (LC) for FY 2019-20 of M/s Madhukar Enterprises: Sr. No. Particulars Amount A Annual Consumption of Raw Material (RM) to be purchased under Letter of Credit (LC) ₹ 69.41 Crore B Average monthly purchase of Raw Material (₹ 69.41 Crore / 12 months) ₹ 5.78 Crore C Lead time i.e. time from order placement to shipment 10 days D Transit Time 20 days E Credit (Usance) Period available 3 months (90 days) F Total Period (C+D+E) 10 days + 20 days + 90 days = 120 days = 4 months G Requirement of LC (B x F) i.e. ₹ 5.78 Crore x 4 ₹ 23.12 Crore i.e. LC limit recommended ₹ 23 Crore

Topics: Working Capital Management

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