. Department Profitability. White's Grocery Store is a small-town operation being threatened by a national discount store outlet being built nearby. Mickey White, the owner, is studying the addition of a department to sell either garden supplies or beer and wine. He has talked to several other owners of similar stores and has reached the following conclusions:

1. A garden supplies department would generate sales of \(\$ 40,000\) per year with a gross profit of 60 percent. No other variable costs would be added. Additional fixed costs would be \(\$ 12,000\). Grocery sales would increase by 5 percent because of increased traffic through the store.
2. A beer and wine department would generate sales of \(\$ 60,000\) per year with a gross profit of 40 percent. No other variable costs would be added, but fixed costs would increase by \(\$ 18,000\). Grocery sales would increase by 8 percent.
The income statement for a typical year for grocery sales alone is as follows:

\section*{Required:}
1. Recompute the effects on income of adding each department.
2. Which department should be added? What qualitative issues appear important?

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Sales $600,000 Cost of goods sold (variable) 240,000 Gross profit $360,000 Other variable costs 120,000 Contribution margin.. Fixed costs.. Income.. $240,000 140,000 $100,000