State Road Fabricators Inc. is considering eliminating Model A777 because of losses over the past quarter. The past three months of information for Model A777 are summarized below:

Sales (1,100 units) $470,000

Manufacturing costs:

Direct materials $160,000

Direct labor ($15 per hour) $80,000

Overhead $150,000

Operating loss ($80,000)

Overhead costs are 75% variable and the remaining 25% is depreciation of special equipment for model A777 that has no resale value.

If Model A777 is dropped from the product line, operating income will:

1. a.decrease by $117,500
2. b.decrease by $80,000
3. c.increase by $80,000
4. d.increase by $37,500