Question

Assignment Steps

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?

Show your work in Microsoft Word or Excel.

Complete calculations/computations using Microsoft Word or Excel.   

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

Answer 1

1…	Static budget	Actual	Variance(Static-Actual)
No.of mares	60	52	8	U
No.of Boarding days	21900	19000	2900
Sales at	547500	380000	167500	U
Less:Variable expenses:
Feed	109500	104390	5110	F
Veterinary fees	65700	58838	6862	F
Blacksmith Fees	5475	4984	491	F
Supplies	12045	10178	1867	F
Total Variable expenses	192720	178390	14330	F
Contribution margin	354780	201610	153170	U
Less: Fixed expenses:
Depn.	40000	40000	0
Ins.	11000	11000	0
Utilities	14000	12000	2000	F
Rep.& Maint.	11000	10000	1000	F
Labor	95000	88000	7000	F
Advt.	8000	12000	-4000	U
Entertainment	5000	7000	-2000	U
Total Fixed expenses	184000	180000	4000	F
Net Income	170780	21610	149170	U

Observations based on the static budget :

Primary cause of loss of net income is the reduction in sales volume &value

Most of the expenses, both variable & fixed ,except advertsing & entertainment , show favourable variance, ie. They are less than that budgeted. So, the management seems to have done a good job , regarding controlling of expenses.

About Management's decisions to stay competitive is sound or otherwise:

Firstly,they have not tried to hire any new employee, in the place of the one who quit, may be taking into consideration the decrease in the no.of boarding days.

But they have spent extra on advertsing & expenses on entertaining clients, so as to increase the sales volume,in future

Going by the above 2 points, their decision to stay competitive does sound good.

1	2	3=2/21900*19000	4	5=3-4
	Static budget	Flexible Budget	Actual	Variance=Flexible-Actual
No.of mares	60	52	52	0
No.of Boarding days	21900	19000	19000	0
Sales at	547500	475000	380000	95000	U
Less:Variable expenses:
Feed	109500	95000	104390	-9390	U
Veterinary fees	65700	57000	58838	-1838	U
Blacksmith Fees	5475	4750	4984	-234	U
Supplies	12045	10450	10178	272	F
Total Variable expenses	192720	167200	178390	-11190	U
Contribution margin	354780	307800	201610	106190	U
Less: Fixed expenses:
Depn.	40000	40000	40000	0
Ins.	11000	11000	11000	0
Utilities	14000	14000	12000	2000	F
Rep.& Maint.	11000	11000	10000	1000	F
Labor	95000	95000	88000	7000	F
Advt.	8000	8000	12000	-4000	U
Entertainment	5000	5000	7000	-2000	U
Total Fixed expenses	184000	184000	180000	4000	U
Net Income	170780	123800	21610	102190	U

Observations based on the Flexible budget,

Here also, the primary cause of loss of net income is the reduction in both sales volume & value

Almost all the variable expenses except supplies show unfavourable variances, ie. They are more than that budgeted for the sales volume. Fixed /semi fixed expenses need full capacity utilisation, ie. sales, to show positive variances--which is not the case here. Sales volume has declined. So, the management seems to have done a poor job , regarding controlling of expenses.

About Management's decisions to stay competitive is sound or otherwise:

As said above, that they have not tried to hire any new employee, in the place of the one who quit--atleast ,helped not to not added any more expenses on labor.

Spending extra on advertsing & on entertaining clients, to increase the sales volume, denotes action in right direction, so as to improve future clietiele.

Going by the above 2 points, their decision to stay competitive does sound good.

Course of action recommended for the management of Green Pastures

to increase sales volume , ie. No. of boarding days

to operate to capacity , to decrease the incidence of fixed costs or to fully utilise the fixed costs.