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 made the boarding business extremely competitive. To meet the competition, Green Pastures planned in 2022 to entertain clients, advertise more extensively, and absorb expenses formerly paid by clients such as veterinary and blacksmith fees.
The budget report for 2022 follows. 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.

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 decline 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, 2022 Actual Master Budget 52 60 19,000 21,900 $380,000 $547,500 104,390 109,500 58,838 65,700 4,984 5,475 10,178 12,045 178,390 192,720 201,610 354,780 40,000 40,000 11,000 11,000 12,000 14,000 10,000 11,000 88,000 95,000 12,000 8,000 7,000 5,000 180,000 184,000 $ 21,610 $170,780 Number of mares Number of boarding days Service revenue Less: Variable expenses Feed Veterinary fees Blacksmith fees Supplies Total variable expenses Contribution margin Less: Fixed expenses Depreciation Insurance Utilities Repairs and maintenance Labor Advertisement Entertainment Total fixed expenses Net income Difference 8U 2,900 U $167,500 U 5,110 F 6,862 F 491 F 1,867 F 14,330 F 153,170 U -0- -0- 2,000 F 1,000 F 7,000 F 4,000 U 2,000 U 4,000 F $149,170 U