Green 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, Green Pastures planned in 2017 to entertain clients, advertise more extensively, and absorb expenses formerly paid by clients such as veterinary and blacksmith fees.

The budget report for 2017 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 $0.25, and supplies $0.55. All other budgeted expenses were either semi-fixed 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.

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.

(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 Green Pastures?

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GREEN PASTURES Static Budget Income Statement For the Year Ended December 31, 2017 Actual Master Budget Difference Number of mares 52 60 8 U Number of boarding days 19,000 21,900 2,900 U Sales $380,000 $547,500 $167,500 U Less: Variable expenses Feed 104,390 58,838 109,500 65,700 5,110 F 6,862 F Veterinary fees Blacksmith fees 4,984 10,178 5,475 491 F Supplies 12,045 1,867 F Total variable expenses 178,390 192,720 14,330 F Contribution margin 201,610 354,780 153,170 U Less: Fixed expenses Depreciation 40,000 11,000 12,000 10,000 88,000 12,000 7,000 40,000 11,000 -0- Insurance -0- Utilities 14,000 2,000 F 1,000 F Repairs and maintenance Labor 11,000 95,000 8,000 7,000 F 4,000 U Advertisement Entertainment 5,000 2,000 U Total fixed expenses 180,000 184,000 4,000 F Net income $ 21,610 $170,780 $149,170 U