PROBLEM 8–1 Johnson Corporation sells primarily two products: (A) consumer cleaners and (B) industrial purifiers.

Its gross margin and components for the past two years are:

Year 7 Year 6 Sales revenue Product A............................... $60,000 $35,000 Product B .............................. 30,000 45,000 Total ...................................... 90,000 80,000 Deduct cost of goods sold Product A............................... 50,000 28,000 Product B .............................. 19,500 27,000 Total ...................................... 69,500 55,000 Gross margin......................... $20,500 $25,000 In Year 6, the selling price of A is $5 per unit, while in Year 7 it is $6 per unit. Product B sells for

$50 per unit in both years. Security analysts and the business press expressed surprise at Johnson’s 12.5% increase in sales and $4,500 decrease in gross margin for Year 7.

Required:

Prepare an analysis statement of the change in gross margin for Year 7 versus Year 6. Discuss and show the effects of changes in quantities, prices, costs, and product mix on gross margin.