Dave Meltzer went to Lake Tahoe for his annual winter vacation. Unfortunately, he broke his ankle severely while skiing and had to spend two days at the Tahoe General Hospital. Meltzer's insurance company received a $4,800 bill for his two-day stay. One item that caught Meltzer's eye was a $10.62 charge for a roll of cotton. Meltzer was a salesman for Johnson & Johnson and knew that the cost to the hospital of the roll of cotton would be in the $2.20 to $3 range. He asked for a breakdown of how the $10.62 charge was derived. The accounting office of the hospital sent him the following information:
a. Invoiced cost of cotton roll .................. $ 2.30
b. Processing of paperwork for purchase ............. 0.50
c. Supplies room management fee ............... 0.60
d. Operating-room and patient-room handling charge ........ 1.50
e. Administrative hospital costs ................ 1.00
f. Research-related recoupment ................ 0.50
g. Malpractice insurance costs ................. 1.10
h. Cost of treating uninsured patients .............. 2.62
i. Profit component ..................... 0.50
Total ............................ $10.62
Meltzer believes the overhead charge is obscene. He comments, “There was nothing I could do about it. When they come in and dab your stitches, it’s not as if you can say, ‘Keep your cotton roll. I brought my own.’”
REQUIRED
1. Compute the overhead rate Tahoe General Hospital charged on the cotton roll.
2. What criteria might Tahoe General use to justify allocation of each of the overhead items (b) through (i) in the preceding list? Examine each item separately, and use the allocation justifications in your answer.
3. What should Meltzer do about the $10.62 charge for the cotton roll?