Green Pastures – Managerial Analysis 6
Green Pastures recorded a decreased net income in 2017 as depicted in the budget report for 2017. The variable expenditure includes the veterinary and blacksmith fees. All other budgeted expenses were fixed.
The primary causes of the decrease in the net income is associated to the decreased of the boarding fee, total of the boarding days and sales revenue:
· The boarding fee was declined by 20%, from $25/day to $20/day. (Projected: $547,500 ÷ 21,900 days = $25 per day. Actual: $380,000 ÷ 19,000 days = $20 per day)
· Total of boarding days declined by 13% or 2900 days
· The actual sales decreased by 31% or $167,000. The actual sales was $380,000 against the expected sales of $547,000.
The resultant contribution margin was smaller than expected, even though the fixed expenses decreased by $4000.
According to the static budget, the management team did poor job in regulating the variable expenses. The expenses should be lowered as the boarding days declined 13%. The variable expenses should be declined by $25,520 ($192,700 x (2,900 ÷ 21,900) = $25,520). Based on the report, variable expense only dereased by $14,330 which is about 7.4% ($14,330 ÷ $192,720 = 0.074). Also, the management did not replace a worker who quit in March. This reduced the impact on expenses considering that hiring the said worker would have added to the wage expenses though their function might be redundant at the farm (Emerson, 2009). In their stead, they issued advertising brochures and entertained their clients more. This expense was justifiable as they needed to increase their competitiveness in the industry.
From this static budget, the management’s decision to stay competitive was sound. The up-take of the veterinary and blacksmith fees would have attracted more customers to Green Pastures. This would have driven the sales to $547,500. However, for better financial performance, the management should limit advertisement after the first quarter. They will have made a good rapport with customers, and would not need aggressive advertisements (Hollensen, 2015). They can integrate customer referrals as part of a cheaper advertising option for the farm.
With the flexible budget, the primary causes of the decline in net income are the decreases in boarding rates and volume. The average daily rate charged was $20 ($380,000 ÷ 19,000), resulted in a decrease in sales revenue of $95,000 or 20% ($95,000 ÷ $475,000). Due to “an extremely competitive business”, if Green Pastures did not reduced the rates, the boarding days certainly would have declined even more.
Based on the flexible budget, the management did a poor job in limiting the expenses. Considering the number of mares have reduced, the amount spent on the mare’s feed increased. Variable expenses were $11,190 over budget or 6.7%, or ($11,190 ÷ $167,200). The same happened to veterinary fees and blacksmith fees. This generated higher total expenditure which reduced the amount of the contribution margin.
The poor economic turnover in the industry had led to a decrease in breeding activities. This affected the number of mares bred as the number dropped from the perceived 60 to 52 mares. Also, the number of boarding days decreased from the perceived 21,900 to 19,000. It is essential that more sales are made considering the number of boarding days were decreasing. Other farms were fighting for the share of the decreasing market. Therefore, in a bid to improve sales, it was necessary to attract customers. Customers can be attracted with reduced cost of acquiring the mares (Shankar, 2012), and superior services. This means that the customers could pay substantially less for the acquisition of the mares. Even in reducing the cost, the company has to reduce by the most reasonable amount in order to stay afloat. The veterinary fees and blacksmith fees were substantial cost which could affect the eventual price of the mares. Therefore, the company was right to up-take these costs to attract more customers. Once customers perceive that Green Pastures is the superior boarding stable, they will win customers over their competitors as many customers would pay a premium for the “best” boarding service.
After capturing substantial market share, the management should return a sizeable percentage of these costs (blacksmith and veterinary fees) back to the consumer. Consider the scenario when these costs are not up-taken by the company, the net income in the flexible and static budget would be $85,432 and $241,955 respectively. Cost-sharing with the customers will help attain sizeable income from the business (Gary, 2009).
Emerson, R. W. (2009). Business Law. Barron’s Bookstore.
Gary L Liliena, A. R. (2009). Bridging the marketing theory–practice gap with marketing engineering. Journal of Business Research, 111-121.
Hollensen, S. (2015). Marketing management: A relationship approach. Pearson Education.
Shankar, V. &. (2012). Handbook of marketing strategy. Cheltenham, UK: Edward Elgar Pub.