Montana Farm is a 400-acre farm on the outskirts of San Bernardino Plains, one of the major suppliers free range eggs in the country. A recent breakout of bird flu in the Asia pacific region has affected the industry amid health concerns which has led to a decline with the demand, and it has made the business extremely competitive. To meet the competition, Montana Farm planned in 2017 to advertise more extensively, boost health of laying hens with regular monitoring of veterinary specialists and sourcing grain from trusted suppliers.

The budget report for 2017 is presented below. As shown, the static income statement budget for the year is based on an expected 69,000 laying hens producing 568,100 dozen of eggs at $3.95 per dozen.

The variable expenses were budgeted as follows:

Per laying hen per month: feed $1.05, nutrition $0.12, supplies $0.06

Per dozen eggs produced: delivery $0.30

All other budgeted expenses were either fixed or mixed expenses.

During the year, management decided not to replace a farm hand who quit in March, but it did issue a new advertising brochure and paid for more promotion and advertising.

MONTANA   FARM
Static   Budget Income Statement
For the Year Ended   December 31, 2017
		Actual	Master	Difference
		Budget
Number of laying hens	65,423	69,000	3,577	U
Number of dozen eggs produced	510,299	568,100
Sales	$ 1,939,138	$ 2,243,995	304,857	U
Less: Variable expenses
Feed	840,031	869,400	29,369	F
Nutrition	109,911	99,360	10,551	U
Supplies	62,806	45,540	17,266	U
Delivery expenses	153,090	170,430	17,340	F
Total variable expenses	1,165,838	1,184,730	18,892	F
Contribution margin	773,300	1,059,265	285,965	U
Less: Fixed expenses
Depreciation	60,000	60,000	0	F
Insurance	69,000	69,000	0	F
Utilities	62,000	58,000	4,000	U
Repairs and maintenance	30,000	25,000	5,000	U
Salary and wages	216,000	230,000	14,000	F
Delivery expenses			0	F
Veterinary fees	87,000	75,900	11,100	U
Advertisement	120,000	105,000	15,000	U
Entertainment	7,000	5,000	2,000	U
Total fixed expenses	651,000	627,900	23,100	U
Net income	122,300	431,365	309,065	U

Instructions

(a) Based on the static budget report:

1. What was 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 Montana Farm?

Answer rating: 100% (QA)

1 The primary causes of the loss in net income are a The reduced sales compared to the budget which contributed 304857 reduction b Even though the toa... View the full answer