THE DISCLOSURE OF THE CONVERSION OF VOLUME AND UTILIZATION OF FIXED CAPITAL IN THE COMMERCIAL RATE OF RETURN

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1 Aals of the Uiversity of Petroşai, Ecoomics, (2), 2, THE DISCLOSURE OF THE CONVERSION OF VOLUME AND UTILIZATION OF FIXED CAPITAL IN THE COMMERCIAL RATE OF RETURN CONSTANTIN CĂRUNTU, MIHAELA LOREDANA LĂPĂDUŞI * ABSTRACT: The efficiecy ad sustaiability i a competitive ecoomy are provided also by the extet to which the compay has a material potetial whose techical ad operatioal parameters meet the ew requiremets of market ecoomy. The maagemet of creatig value at the eterprise level requires selectig from a rage of alterative ivestmets that variat that icubated the most likely probability to icrease the value of the firm. The fixed capital of the compay is a productio factor with a sigificat role i the performaces of ecoomic efficiecy of it. The fixed capital icorporates a certai qualitative level of the productio tehologies ad its effectiveess will deped decisively o the degree of physical ad moral wear ad also by the degree to which productio capacity is used. At compay level, ecoomic efficiecy is called retur ad, if the ratio betwee effect ad effort is expressed as a percetage, is called rate of retur. The key elemet of a compay's profitability is the profit which, i its various forms, is take ito accout i determiig the differet rates of retur. The objective of ay eterprise is to achieve maximum beefit ad profitability of capital ivested with the view to esure its developmet ad compesatio of those who made capital ivestmets. The profitability is oe of the sythetic forms of expressig the efficiecy of the etire fiacial-ecoomic activities of the eterprise, respectively of all the meas of productio used ad labor force, i all stages of ecoomic circuit: supply, productio ad sales. KEY WORDS: fixed capital; commercial rate of retur; rate of retur of resources cosumed; efficiecy; productivity; ecoomic profitability; fiacial profitability JEL CLASIFICATION: D24, D6, E22 * Prof., Ph.D., Costati Brâcuşi Uiversity of Târgu Jiu, Romaia, carutu_cti@yahoo.com Lecturer, Ph.D., Costati Brâcuşi Uiversity of Târgu Jiu, Romaia, loredaa@utgjiu.ro

2 62 Cărutu, C.; Lăpăduşi, M.L.. INTRODUCTION Ay compay, regardless of the profile ad size,the socio-ecoomic space i which it operates, must costatly prove the viability, competitive ability ad adaptatio, ecoomic ad fiacial performace, especially sice the clasical mechaism of market ecoomy are formed ad will work with all the rigors of that are ivolved. As ecoomy develops, fixed capital items are subject to multiple chages i the processes related to busiess activity: formatio of ew capital, reewal ad moderizatio of the existig oes, depreciatio or wear of fixed capital, removal from service. The formatio of ew fixed capital is the result of ivstmets, these are composed of the total expeses made by the compay for the developmet of the productio capacity (capital iputs). Such ivestmets serve as a egie for ecoomic growth, they have as a source a part of the beefit(profit) obtaied by the producers ad by the the depreciatio fud. Ecoomic efficiecy of the use of fixed capital is give by the effort made for the purchase ad operatio, ad the results or outcome from its use. The compoets of fixed capital put their mark o profits, maily by the depreciatio rates which directly affect the productio cost ad product quality which is reflected i the sale price. The icrease of physical productio has the role to amplify the differece betwee the sellig price ad the productio cost, which is just the aual profit obtaied from the product cocered. For the formulatio of relevat coclusios is recommeded the calculus dyamics idicators metioed above, ad the quatificatio of the ifluece of direct ad idirect factors, withi the iformatio available. I terms of its techical, productive ad ivestmet cotet, the capital comprises those reproductive assets which coditio the cotious ad efficiet productio of ecoomic goods that have to be maitaied to assure the ecessary rate of the ecoomic activity. The maagemet theory ad practice demostrate that the mai objective of ay orgaizatio is to icrease efficiecy. I this cotext,the fuctios of the fiacial maagemet require buildig a system of rates of retur that, through structure ad cotet, to represets a useful ad powerful tool for busiess. To meet its aspiratios, the use rates of retur implies complyig with some basic coditios: the formulatio of rates as characteristic for the pheomeo studied, esurig the comparability of rates ad prudet iterpretatio of the rates. I case of the study that we coducted we paid special attetio to the commercial rate of retur ad to the rate of retur i terms of volume cosumed from the perspective of volume ad use of fixed capital. 2. THE DISCLOSURE OF THE CONVERSION OF VOLUME AND UTILIZATION OF FIXED CAPITAL (FIXED ASSTES) IN THE COMMERCIAL RATE OF RETURN The level of this ratio represets the sythetic ad obvious measure of the level of profitability give by the compay i its productio ad trade activity. It advatages

3 The Disclosure of the Coversio of Volume ad Utilizatio of Fixed 63 the iterests of owers ad maagers showig their cotributio i the procuremet of the compay s performaces. The aalysis of the relatio betwee the volume ad utilizatio of fixed capital (fixed assets) with the commercial rate of retur ca be doe by optimizig the followig aalysis model: A Cf Rc Tu r or A Cf Rc Tu r Tu r Tu r Rc - the ecoomic rate of retur; - the amout of the variable expeses afferet to turover; A - suma amortizării mijloacelor fixe aferete cifrei de afaceri; Cf - the amout of other fixed expeses without depreciatio ; Tu - the work time of idustrial equipmets ; CA r - the average hourly yield based o turover. Tu () (2) For the practical exemplificatio of the disclosure of the volume ad utilizatio of fixed capital (fixed assets) i the commercial rate of retur, we use the followig: Table. No Idicator Chage. Turover Work time of idustrial equipmets - hours The average hourly yield 2,6 2,6 +,54 4. The amout of the profit afferet to turover Variable costs afferet to turover Fixed costs afferet to turover Total costs afferet to turover The depreciatio of fixed assets afferet to turover Other fixed expeses without depreciatio Variable costs from 27 afferet to the turover of 28 X qv cv o. Expeses with depreciatio o products from 27 X afferet to the turover from Other fixed expeses of products from 27 X afferet to the turover of The commercial rate of retur 9,89% 2% +2,% The absolute chage of the commerical rate of retur i 28 compared to 27 with 2.% is obtaied as it follows:

4 64 Cărutu, C.; Lăpăduşi, M.L. A Cf A Cf Rc Rc Rc Tu r Tu r ,6 8. 2, ,89 2,% (3) The factorial explaatio of the volume ad utilizatio of fixed assets through turover is doe by usig the followig iflueces. The ifluece of the turover value: Rc A Cf A Cf CA Tu r Tu r ,6 8. 2, ,88 9,89 32,99% (4) from which:. The ifluece of the total work time: Rc A Cf A Cf Tu Tu r Tu r ,6 8. 2, ,9 9,89 8,2% (5).2 The ifluece of the average hourly yield: Rc A Cf A Cf r Tu r Tu r ,6.. 2, ,88 27,9 4,97% (6)

5 The Disclosure of the Coversio of Volume ad Utilizatio of Fixed The ifluece of total costs: Rc A Cf A Cf Ct Tu r Tu r ,6.. 2, ,88 3,88% (7) from which: 2.. The ifluece of the variable costs afferet to turover: Rc A Cf A Cf Tu r Tu r ,6.. 2, ,39 42,88 22,49% (8) 2.2. The ifluece of the depreciatio amout (expressio of the volume of the used workig capital): Rc A Cf A Cf A Tu r Tu r ,6.. 2, ,98 2,39,4% (9) 2.3. The ifluece of other fixed assets without depreciatio: Rc A Cf A Cf Cf Tu r Tu r ,6.. 2, ,98 7,98% () For verificatio we have the relatio:

6 66 Cărutu, C.; Lăpăduşi, M.L. Rc Rc Rc 2,% 32,99% 3,88% 2,% 2,% () CA Ct By cuttig the variables related to fixed assets i acceptig the isolated actio (so it eters ito the combiatio of all factors that compete to the completio effect) it is oted that the total workig time i wgich is reflected also the valome ad the yield i value o time uit have cotributed to the icrease of the commercial rate of retur (with 8.2% ad 4.97%). The compoets of costs, through which the depreciatio, that express the used volume of fixed assets have determied decreases of the commercial rate of retur( the icrease of the amout of depreciatio has a ifluece of -.52%). By separatig the ifluece 2 which refers to the coversio of the amout of depreciatio that reflects the volume ad structure of fixed capital ad its yield, beig ivolved the depreciatio expese at leu, we otice the reflectio of the three issues i icreasig busiess profitability. 3. OTHER RETURN RATES THROUGH WHICH THE THE VOLUME AND UTILIZATION OF FIXED CAPITAL ARE DISCLOSED 3.. The disclosure of fixed capital through the ecoomic rate of retursythesizer The ecoomic profitability represets a ratio betwee profit ad the value of volume of the compay s assets. The differet sizes of profit, i the case of ecoomic profitability, refer to the profit s size before tax, this beig curret or operatig profit, or gross operatig surplus. For the rate of retur, fixed capital is showed by the followig aalysis model: Pc Pe Pf Re At Ai Ac M f Mf a Ve Pe Pf Re At M f Mf a Ve At M f Mf a Tu Ve Pe Pf Re At M f Mf a Tu Ve At Re the ecoomic rate of retur; At - total assets; Pe - operatig profit; Pf - fiacial profit; Ai - fixed assets; M f - average value of total fixed assets; M fa - average value of active fixed assets; (2) (3) (4)

7 The Disclosure of the Coversio of Volume ad Utilizatio of Fixed 67 Ve - operatig reveues; The factorial exemplificatio of the ecoomic rate of retur by reflectig the fixed capital through the model M f Mf a Ve Pe Pf Re implies the followig At M f Mf a Ve At iflueces:. The ifluece of the share of fixed assets i total assets: Re M f M f Mf a Ve Pe Pf Mf At At At M f Ve Mfa At (5) 2.The ifluece of the share of active fixed assets i total fixed: Re M f Mfa Mf a Ve Pe Pf Mfa At Mf M f Ve M f Mfa At (6) 3.The ifluece of operatig reveues at lei fixed assets: Re M f Mf a Ve Ve Pe Pf Ve At M fa M f Ve Mf a Mf a At (7) 4. The ifluece of operatig profit at leu operatig reveues : Re M f Mf a Ve Pe Pe Pf Pe Ve At M f Ve Mf a Ve At (8) 5. The ifluece of fiacial profit at lei total assets : Re M f Mfa Ve Pe Pf Pf Pf At At Mf Ve Mfa At At (9) 3.2. The disclosure of fixed capital through the fiacial rate of retursythesizer The fiacial rate of retur (ROE - Retur o Equity) is oe of the major idicators followed by ivestors ad maagemet. With this rate, ivestors ca assess whether their ivestmet is profitable or ot. If the fiacial rate of retur exceeds the cost of capital, tha, by the activity, the compay creates additioal value for shareholders. Similarly we will otice the impact of volume, structure ad use of fixed capital (fixed assets) o the fiacial rate of retur, of course, from this model:

8 68 Cărutu, C.; Lăpăduşi, M.L. P-et profit; -owers equity. P (2) Accordig to he correlatio methodology, the volume, structure ad utilizatio of fixed capital are showed by the operati profit i the way that: P Pe Pf Pext I (2) Pex - extraordiary profit; - deductios from the taxable icome; I - icome tax This rate is a relevat idicator i assessig the compay's positio o the market. A icrease i the remueratio of capital ivested provides: easy access to fiacial resources due to curret owers trust to reivest i the busiess ad of potetial ivestors - holders of fiacial resources available for ivestmets, the capacity of developmet. The aalysis of the fiacial rate of retur allows the breakdow of the ifluece of determiat factors ad idetify some sigificat issues to iterpret the performace of the compay at level of each of them, usig several models of factorial aalysis, accordig to the objectives pursued. I our case the objective is to highlight the volume ad use of fixed capital, ad the above model traslated ito a multiplicative model to highlight this objective ca be detailed i the followig variables: M f M fa Tu Ve Pe Pf Pext M f M fa Tu Ve (22) Because the first group of variable factors is coected to volume,structure (tehological compositio) ad utilizatio (extesive ad itesive) of assets, by usig it we ca make quatificatios of the reflectio i the fiacial rate of retur. So, the factorial exemplificatio assumes the followig iflueces :.The ifluece of the share of average fixed assets i owers equity: M f M f M fa Tu Ve Pe M f M f Tu M fa Ve (23) 2.The ifluece of the share of active fixed assets i total fixed assets:

9 The Disclosure of the Coversio of Volume ad Utilizatio of Fixed 69 M f M fa M fa Tu Ve Pe M fa M f M f Tu M f M fa Ve (24) 3.The ifluece of the utilizatio time of fixed assets: M f M fa Tu Tu Ve Pe Tu M fa M f Tu M fa M fa Ve (25) 4.The ifluece of operatig reveues o time uit: M f M fa Tu Ve Ve Pe Ve Tu M f Tu M fa Tu Ve (26) 5.The ifluece of operatig profit at leu operatig reveues: M f M fa Tu Ve Pe Pe Pe Ve M f Tu M fa Ve Ve (27) 6.The ifluece of the fiacial profit at leu owers equity: Pf Pf Pf (28) 7. the ifluece of the extraordiary profit at ley owers equity: Pext Pext Pext (29) 3.3. The disclosure of fixed capital through the rate of retur of resources cosumed- sythesizer The rate of retur of resources cosumed is expressed as a ratio betwee a particular ecoomic result ad the costs icurred i obtaiig it. It is called the rate of retur of costs ad i the literature there are views that the optimal level of the rates of retur of costs are i the rage of 9% -5%. It shows iterest to busiess maagers, who must esure efficiet use of available resources. So c we we cosider the followig rates: a) the rate of retur of operatig costs: EBE Rce Ce A Cpe (3)

10 7 Cărutu, C.; Lăpăduşi, M.L. or Pe Rce (3) Ce Ce - operatig costs ; A - depreciatio costs; Cpe - costs with operatig provisios. b) the rate of retur of costs afferet to turover Pr Rce q c Pr - profit afferet to turover ad the cost of productio sold. (32) or c)the rate of retur of resources cosumed : Tu r Rc A Cf Tu r Tu r Tu r Rc A Cf (33) (34) Over this rate of retur the costs have a double actio, ifluecig differetly the size of the umerator ad of the deomiator. I the case of exceedig the uitary costs, the umerator( represetig turover) is reduced ad the deomiator (represetig total costs) icreases, what shows the egative ifluece of this factor over the rate of retur of the resources cosumed to be more stroger tha i the case of other rate. The factorial explaatio assumes the followig iflueces:. The ifluece of total costs: Rc Tu r Tu r Ct A Cf A Cf (35) From which:.the ifluece of variable costs : Rc Tu r Tu r A Cf A Cf (36).2.The ifluece of the amout of depreciatio : Rc Tu r Tu r A A Cf A Cf (37)

11 The Disclosure of the Coversio of Volume ad Utilizatio of Fixed 7.3. The ifluece of other fixed costs: Rc Tu r Tu r Cf A Cf A Cf (38) 2.The ifluece of turover : Rc Tu r Tu r CA A Cf A Cf (39) From which: 2.. The ifluece of total work time: Rc Tu r Tu r Tu A Cf A Cf (4) 2.2. The ifluece of the average hourly yield: Rc Tu r Tu r r A Cf A Cf (4) 4. THE DISCLOSURE OF FIXED CAPITAL THROUGH THE RATE OF RETURN OF USED CAPITAL (FIXED AND WORKING) - SYNTHESIZER The model of calculus ad aalysis of used capital is recommeded to be the followig oe: qvi pi qvi ci CA pr Cr M f Ac qvi pi i - the rate of retur of the used capital; Cr - real-fixed- workig capital; CA Cr - the efficiecy of real capital. i i pr -average profit at leu turover ; qvi - the structure of the productio sold; pi - average sale price ; - iflatio; pi - price less iflatio effect; csj - the physical cosumptio of resources o products; pj - the aquisitio price-o the resource uit. (42)

12 72 Cărutu, C.; Lăpăduşi, M.L. The iflueces that are at the base of the model are:.the ifluece of the efficiecy of the real- fixed ad workig capital CA CA CA pr Cr Cr Cr (43) 2.The ifluece of the average profit at leu turover : CA pr pr pr Cr From which : 2.The ifluece of the structure of the productio sold : CA qvi pr pr Cr pr i i qvi ci qvi pi 44) (45) (46) 2.2.The ifluece of sale prices o products: CA pr pr pi Cr pr i i qvi ci qvi pi (47) (48) From which: 2.2..The ifluece of the sale prices o products less the iflatio effect: CA ( i) pr pr Cr pr ( i) i i qvi ci qvi pi IP (49) (5)

13 The Disclosure of the Coversio of Volume ad Utilizatio of Fixed The ifluece of the sale prices o products less the iflatio effect : CA ( i) pi pr pr Cr 2.3.The ifluece of costs o products: CA ci pr pr Cr From which: The ifluece of the physical cosumptio of resources o products: CA ( csj ) csj pr pr Cr pr ( csj ) i j i m qvi csj pj qvi pi The ifluece of acquisitio prices o the resource uit: CA ( csj ) pj pr pr Cr (5) (52) (53) (54) (55) 5.CONCLUSIONS The ifluecig factors of the efficiecy of fixed assets represet growt reserves of profitability. I assessig the overall efficiecy of productio factors is ecessary to highlight the correlatios of efficiecy at the eterprise level, which allow the establishmet of factorial iterdepecies ad their itesity,idetifyig the measures eaded for improvig the the performaces of the compay. From this poit of view we have to take ito cosideratio the followig correlatios: Depedet variable: P - profit at leu fixed assets; M f CA - turover at leu fixed assets; M f Qf - maufactured productio at leu fixed assets. M f Idepedet variables:

14 74 Cărutu, C.; Lăpăduşi, M.L. Qf Q max - the degree of utilizatio of the productio capacity; M fa - the tehological compositio of fixed assets; M f Qf - labour productivity. Ns The character of the ecoomic efficiecy of the utilizatio of fixed capital is completed by the aalysis of some correlatio idicators as: the correlatio betwee fixed capital ad productio- for havig a better efficiecy of the utilizatio of fixed capital is ecessary that the volume of the aual productio to icrease i a faster rate (value) tha the aual average value of fixed capital ; the correlatio betwee labour productivity ad techical edowmet- a efficiet use of fixed capital is doe whe we have a faster rate of icrease of the idex of labour productivity comparatively with the idex of techical edowmet with fixed capital. REFERENCES: []. Aghel, I.; Diu, E. (27) Strategia şi aaliza ecoomico - fiaciară a firmei, Editura ASE, Bucureşti [2]. Brezeau, P. (coord.) (27) Aaliză fiaciară, Editura Meteor Press, Bucureşti [3]. Bruer, R.; Eades, K.; Harris, R.; Higgis, R. (996) Best Practices i Estimatig the Cost of Capital: Survey ad Sythesis, Darde School Workig Paper, No.96-3, Graduate School of Busiess Admiistratio, Uiversity of Virgiia [4]. Calleder, G. (28) Efficiecy ad Maagemet, Editura Taylor & Fracis [5]. Cărutu, C. (29) Aaliza ecoomico-fiacară a firmei. Cocepte.Metode.Aplicaţii, Editura Uiversitaria, Craiova [6]. Cărutu, C.; Lăpăduşi, M.; Cărutu, G. (25) Aaliză ecoomico-fiaciară la ivel microecoomic, Editura Uiversitaria, Craiova [7]. Coelli, T.; Prasada Rao, D.S., O'Doell, C.; Battese, G. (26) A Itroductio to Efficiecy Ad Productivity Aalysis, Ed.Spriger Verlag, Germaia [8]. Pratt, S.; Grabowski, R. (28) Cost of Capital, Joh Wiley & Sos Ic, USA

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