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 2012 to entertain clients, advertise more extensively, and absorb expenses formerly paid by clients such as veterinary and blacksmith fees.

The budget report for 2012 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.

Data for this case are based on Hans Sprohge and John Talbott, “New Applications for Variance Analysis,”
Journal of Accountancy (AICPA, New York), April 1989, pp. 137–141.

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?
MANAGERIAL ANALYSIS

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GREEN PASTURES Static Budget Income Statement For the Year Ended December 31, 2012 Master Number of mares Actual 52 Budget Difference 60 8 U Number of boarding days 18,980 21,900 2,920 U Sales $379,600 $547,500 $167,900 U Less: Variable expenses Feed 104,390 109,500 5,110 F Veterinary fees 58,838 65,700 6,862 F Blacksmith fees 6,074 6,570 496 F Supplies 10,178 12,045 1,867 F Total variable expenses 179,480 193,815 14,335 F Contribution margin 200,120 353,685 153,565 U Less: Fixed expenses Depreciation 40,000 40,000 Insurance 11,000 11,000 -0- Utilities 12,000 14,000 2,000 F Repairs and maintenance 10,000 11,000 1,000 F Labor 88,000 96,000 8,000 F Advertisement 12,000 8,000 4,000 U Entertainment 7,000 5,000 2,000 U Total fixed expenses 180,000 185,000 5,000 F Net income $ 20,120 $168,685 $148,565 U