University of Phoenix, School of Business
I was tasked with preparing an examination based on the flexible budget report and the static budget report of Green Pastures. I will explain the primary cause of loss in net and other courses of action recommended for management of Green Pastures. The compiled messages below are examples provided from the course textbook along with other outside sources.
Static Budget Report
The primary causes of the loss in net income were the decrease in the number of boarding days and the decrease in the boarding fee. The number of boarding days decreased by 2,900 or approximately 13% (2,900 days ÷21,900 days), and the boarding fee decreased from $25(a) per day to $20(b) per day, a decrease of 20% ($5 ÷ $25). Together these resulted in a $167,500 decrease in sales revenue, a decrease of approximately 31% ($167,500 ÷$547,500).
(a)$547,500 ÷ 21,900 days = $25 per day
(b)$380,000 ÷ 19,000 days = $20 per day
Management did a poor job in controlling variable expenses. Given that boarding days declined by about 13%, variable expenses should decline by about 13%, or more precisely, variable expenses should decline by $25,520 ($192,720 X 2,900/21,900). However, variable expenses only declined by $14,330 or about 7.4% ($14,330 ÷ $192,720). Thus, management did a poor job in controlling variable expenses. Management did a better job in controlling fixed expenses. Fixed expenses were under budget by $4,000 and this includes the additional expenses incurred in advertising and entertainment.
Management’s decisions to stay competitive probably were sound. Given the decline in boarding days, the decision not to replace the worker was sound. The decision to reduce rates was probably forced by the competition. Without the additional advertising and entertainment expenses, the loss in net income might have been even greater.
Flexible Budget Report
For the Year Ended December 31, 2017
|Budget at||Actual at||Favorable F|
|19,000 BD||19,000 BD||Unfavorable U|
|$475,000||$380,000||$ 95,000 U|
|Feed ($5)||95,000||104,390||9,390 U|
|Veterinary fees ($3)||57,000||58,838||1,838 U|
|Blacksmith fees ($.25)||4,750||4,984||234 U|
|Supplies ($.55)||10,450||10,178||272 F|
|expenses ($8.80)||167,200||178,390||11,190 U|
|Depreciation||40,000||40,000||$ 0 U|
|Repairs and maintenance||11,000||10,000||1,000 F|
|Total fixed expenses||184,000||180,000||4,000 F|
The primary causes of the decrease in net income are the decreases in boarding rates and volume. The average daily rate charged was $20 = ($380,000 ÷19,000). This rate resulted in a decrease in sales revenue of $95,000 or 20%= ($95,000 ÷ $475,000). Given that it is “an extremely competitive business,” if Green Pastures had not reduced rates, boarding days almost certainly would have declined even more.
Management did a poor job of controlling variable expenses. These expenses in total were $11,190 over budget or 6.7%, or ($11,190 ÷ $167,200). Moreover, each individual variable expense was over budget, except for supplies. Management did a good job of controlling fixed expenses as noted in the static budget report section, and the management’s decisions to stay competitive probably were sound.
Given that the industry is “extremely competitive,” management should consider two options. One, become the lowest cost operator. If Green Pastures is the company with the lowest operating costs, it can underprice its competitors and take customers away from them (increasing its sales). Eventually, some of its competitors (those with the highest operating costs) will go out of business, and Green Pastures will get their customers, or at least some of them. (Wal-Mart is an example of this strategy.) Option two is to offer its customers a superior product or service. If customers perceive that Green Pastures is the “best” boarding stable in Kentucky, the company will take customers away from its competitors. Also, if Green Pastures is perceived as the “best,” many customers will be willing to pay a premium for its boarding service, and Green Pastures will be able to raise its rates. (Gillette is an example of this strategy.)
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