Landon Poteet has just started a new business—building and installing custom garage organization systems. Landon builds the cabinets and work benches in his workshop and then installs them in clients’ garages. Landon figures his overhead for the coming year will be $9,000. Since his business is labor intensive, he plans to use direct labor hours as his overhead driver. For the coming year, he expects to complete 75 jobs, averaging 20 direct labor hours each. However, he has the capacity to complete 125 jobs averaging 20 direct labor hours each.

Required:

1. Four measures of activity level were mentioned in the text. Which two measures is Landon considering in computing a predetermined overhead rate?

2. Compute the predetermined overhead rates using each of the measures in your answer to Requirement 1.

3. Which one should Landon use? Why?