Harold Monette vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Monette's insurance company received a $4,950 bill for his two-day stay. One item that caught Monette's attention was a $10.60 charge for a roll of cotton. Monette is a salesman for Johnson & Johnson and knows that the cost to the hospital of the roll of cotton is between $2.45 and $3.25. He asked for a breakdown of the $10.60 charge. The accounting office of the hospital sent him the following information:

a. Invoiced cost of cotton roll......................................$ 2.65

b. Cost of processing of paperwork for purchase..................0.57

c. Supplies-room management fee..................................0.74

d. Operating-room and patient-room handling costs.............1.62

e. Administrative hospital costs.....................................1.06

f. University teaching-related costs.................................0.61

g. Malpractice insurance costs.......................................1.18

h. Cost of treating uninsured patients..............................1.52

i. Profit component....................................................0.65

Total..................................................................$10.60

Monette believes the overhead charge is outrageous. 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 Sierra University Hospital charged on the cotton roll.

2. What criteria might Sierra use to justify allocation of the overhead items b-i in the preceding list? Examine each item separately and use the allocation criteria listed in Exhibit 14-8 (page 572) in your answer.

3. What should Monette do about the $10.60 charge for the cotton roll?