Z-Bar Pastures is a 160-hectare farm on the outskirts of Swift Current, Saskatchewan, specializing in the boarding of brood mares 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, Z-Bar Pastures planned in 2016 to entertain clients, advertise more extensively, and absorb expenses formerly paid by clients, such as veterinary and blacksmith fees.
The budget report for 2016 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 as follows: feed $5; veterinary fees $3; blacksmith fees $0.30; and supplies $0.70. All other 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 entertained clients more.

Instructions
(a) Based on the static budget report, answer the following questions:
1. What was(were) 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 Z-Bar Pastures?
(Data for this case are based on Hans Sprohge and John Talbott, "New Applications for Variance Analysis," Journal of Accountancy (April 1989), pp. 137-141.)

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Z-BAR PASTURES Static Budget Income Statement Year Ended December 31, 2016 Master Budget Actual Difference Number of mares Number of boarding days Sales Less variable expenses 60 21,900 $547,500 52 19,000 $380,000 2,900 U S167,500 U Feed Veterinary fees Blacksmith fees Supplies 109,500 65,700 5,475 12,045 192,720 354,780 104,390 58,838 4,984 10,178 178,390 201,610 5,110 F 6,862 F 491 F 1,867 F 14,330 F 153,170 U Total variable expenses Contribution margin Less fixed expenses Depreciation Insurance Utilities Repairs and maintenance Labour Advertisement Entertainment 40,000 11,000 14,000 11,000 95,000 8,000 5,000 184,000 $170,780 40,000 11,000 12,000 10,000 88,000 12,000 7,000 180,000 S 21,610 2,000 F 1,000 F 7,000 F 4,000 U 2,000 U 4,000 F $149,170 U Total fixed expenses Net income