Vander Belt Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have been prepared to evaluate the benefits from the reorganization:

	Before the change	After the change
Total annual sales	$250,000	$375,000
Costs as percentage of sales:
Direct materials	$50,000	$63,750
Direct labor	$20,000	$30,000
Manufacturing Support costs	$30,000	$22,500
Work-in-process inventory	$50,000	$ 40,000

Inventory carrying costs are estimated to be 11% per year.

As a result of the layout reorganization, incremental manufacturing costs are projected to:

1)	decrease by $11,400 annually.

2)	decrease by $12,500 annually.

3)	increase by $12,500 annually.

4)	increase by $16,250 annually.