Skin FX Corporation manufactures the special materials used to create face masks and realistic body parts for the movie industry. The company is preparing its projected financial statements for the upcoming year and hopes to use them to secure a bank loan. The proceeds of the loan will be used to increase capacity at the plant.

At current capacity, total overhead is about $1.2M, with about 170,000 total direct labor hours. If the company expands, the increased capacity will generate a total overhead of $1.7M, with 195,000 direct labor hours.

• Which amounts would you use to calculate the overhead rate, and why?

• What are the advantages of using the high or low estimates?