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 2020 to entertain clients, advertise more extensively, and absorb expenses formerly paid by clients such as veterinary and blacksmith fees. The budget report for 2020 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 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 did more entertaining of clients.¹

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 CT23.1a. 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, 2020 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 5,110 F 104,390 109,500 58,838 Veterinary fees 65,700 6,862 F Blacksmith fees 4,984 5,475 491 F Supplies Total variable expenses 10,178 12,045 1,867 F 178,390 14,330 F 192,720 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 2,000 F 14,000 Repairs and maintenance 10,000 1,000 F 11,000 Labor 88,000 7,000 F 95,000 Advertisement 12,000 8,000 4,000 U Entertainment 7,000 5,000 2,000 U Total fixed expenses 180,000 $ 21,610 184,000 4,000 F Net income $170,780 $149,170 U