G-Bar Pastures is a 400-acre farm on the outskirts of the Kentucky Bluegrass, specializing in the boarding of broodmares and their foals. A recent economic downturn in the thoroughbred industry has led to a decline in breeding activities, and it has made the boarding business extremely competitive. To meet the competition, G-Bar Pastures planned in 2010 to entertain clients, advertise more extensively, and absorb expenses formerly paid by clients such as veterinary and blacksmith fees.

The budget report for 2010 is presented below. As shown, the static income statement budget for the year is based on an expected 21,900 boarding days at $25 per mare. The variable expenses per mare per day were budgeted: Feed $5, Veterinary fees $3, Blacksmith fees $0.30, and Supplies $0.55. All other budgeted expenses were either semifixed or fixed. During the year, management decided not to replace a worker who quit in March, but it did issue a new advertising brochure and did more entertaining of clients.¹

Instructions

With the class divided into groups, answer the following.

(a) Based on the static budget report:

(1) What was the primary cause(s) of the loss in net income?

(2) Did management do a good, average, or poor job of controlling expenses?

(3) Were management’s decisions to stay competitive sound?

(b) Prepare a flexible budget report for the year based on boarding days.

(c) Based on the flexible budget report, answer the three questions in part (a) above.

(d) What course of action do you recommend for the management of G-Bar Pastures?

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G-BAR PASTURES Static Budget Income Statement Year Ended December 31, 2010 Master Actual Budget Difference Number of mares per day 52 60 8* Number of boarding days 18,980 21,900 2,920* $379,600 $547,500 $167,900* Sales Less variable expenses: Feed 104,390 58,838 109,500 65,700 5,110 Veterinary fees 6,862 6,570 Blacksmith fees 6,074 496 Supplies Total variable expenses 10,178 12,045 1,867 193,815 14,335 179,480 Contribution margin 353,685 200,120 153,565* Less fixed expenses: Depreciation 40,000 11,000 12,000 10,000 88,000 40,000 11,000 -0- -0- 2,000 1,000 8,000 4,000* 2,000* Insurance Utilities 14,000 11,000 Repairs and maintenance Labor 96,000 Advertisement 12,000 8,000 7,000 Entertainment 5,000 Total fixed expenses 180,000 185,000 5,000 $ 20,120 Net income $168,685 $148,565* *Unfavorable.