Coral Seas Jewelry Company makes and sells costume jewelry. For the coming year, Coral Seas expects sales of $15.9 million and cost of goods sold of $8.75 million. Advertising is a key part of Coral Seas’ business strategy, and total marketing expense for the year is budgeted at $2.8 million. Total administrative expenses are expected to be $675,000. Coral Seas has no interest expense. Income taxes are paid at the rate of 40 percent of operating income.
Required:
1. Construct a budgeted income statement for Coral Seas Jewelry Company for the coming year.
2. What if Coral Seas had interest payments of $500,000 during the year? What effect would that have on operating income? On income before taxes? On net income?