Scenario: 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 as an attachment. 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 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. 

Develop a 700-to 1050-word examination of the financial statements and include the following based on the static budget report:

• What was the primary cause(s) of the loss in net income?
• Did management do a good, average, or poor job of controlling expenses?
• Were management’s decisions to stay competitive sound?
• Prepare a flexible budget report for the year.
• Based on the flexible budget report:

What was the primary cause(s) of the loss in net income?
Did management do a good, average, or poor job of controlling expenses?
Were management’s decisions to stay competitive sound?

• What course of action do you recommend for the management of Green Pastures?

1

University of Phoenix Material

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
109,500
5,110 F

Veterinary Fees

58,838

65,700
6,862 F

Blacksmith Fees

4,984

5,475
491 F

Supplies

10,178

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

40,000
-0-

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

95,000
7,000 F

Advertisement

12,000

8,000
4,000 U

Entertainment

7,000

5,000
2,000 U

Total Fixed Expenses

180,000
184,000
4,000 F

Net Income

$21,610
$170,780
$149,170 U

Copyright © XXXX by University of Phoenix. All rights reserved.

Copyright © 2017 by University of Phoenix. All rights reserved.