Question

1 More Info - X fort the cli- h the Johnson Drugs ($ in thousands) Industry Gross Profit Percent for Retailers of Drugs and Related Products WC les Nondrug Sales Ondr 2019 Drug Sales 4,913 4,805 $ 32.7 8,887 7,595 6,376 5,656 Drug Cost of Goods Sold $ 2,815 2,672 2,529 2,480 Nondrug Cost of Goods Sold $ 5,990 5,119 4,304 3,829 2018 32.8 33.0 4,524 2017 2016 4,444 33.2 Print Done

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Answer 1

Part A

Year	Gross margin % Drug sales	Gross margin % Nondrug sales
2019	42.7%	32.6%
2018	44.4%	32.6%
2017	44.1%	32.5%
2016	44.2%	32.3%

Gross margin % Drug sales = (drug sales – drug cost of goods sold)/drug sales

Gross margin % Nondrug sales = (nondrug sales – nondrug cost of goods sold)/nondrug sales

2019

Gross margin % Drug sales = (4913-2815)/4913 =42.7%

Gross margin % Nondrug sales = (8887-5990)/8887 =32.6%

2018

Gross margin % Drug sales = (4805-2672)/4805 = 44.4%

Gross margin % Nondrug sales = (7595-5119)/7595 = 32.6%

2017

Gross margin % Drug sales = (4524-2529)/4524 = 44.1%

Gross margin % Nondrug sales = (6376-4304)/6376 = 48.1%

2016

Gross margin % Drug sales = (4444-2480)/4444 = 44.2%

Gross margin % Nondrug sales = (5656-3829)/5656 = 32.3%

The explanation given by Margie Avell is correct in part, but appears to be overstated.The gross margin percentage is approximately consistent in case of nondrugs whereas the percent dropped significantly in the current year, far more than the industry decline. The percent had been extremely stable before 2019. In dollars, the difference is approximately $83521 ((44.4%-42.7%)*4913000), which appears to be significant. The decline in Johnson’s prices may be greater than the industry due to exceptional competition.

Part B

As the auditor, you cannot accept Avell's explanation if $83521 is material. The decline in gross margin could be due to several reasons like

- understatement of drug inventory

- theft of drug inventory

- understated sales

It is essential to determine if the decline is due to competitive factors or to a misstatement of income