Question
Brian McGarrigle went to Les Arcs for his annual winter vacation. Unfortunately, he suffered a broken ankle while skiing and had to spend two days
Brian McGarrigle went to Les Arcs for his annual winter vacation. Unfortunately, he suffered a
broken ankle while skiing and had to spend two days at the Hpital de Grasse. McGarrigle's
insurance company received a 4800 bill for his two-day stay. One item that caught McGarrigle's
eye was an 11.52 charge for a roll of cotton wool. McGarrigle was a salesman for Boots and
knew that the cost to the centre of the roll of cotton wool would be in the 2.20 to 3.00 range.
He asked for a breakdown of how the 11.52 charge was derived. The accounting office of the
center sent him the following information:
a Invoiced cost of cotton wool roll 2.40
b Processing of paperwork for purchase 0.60
c Supplies room management fee 0.70
d Operating-room and patient-room handling charge 1.60
e Administrative centre costs 1.10
f University teaching-related recoupment 0.60
g Malpractice insurance costs 1.20
h Cost of treating uninsured patients 2.72
i Profit component 0.60
Total 11.52
McGarrigle believes the overhead charge is excessive. 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
wool. I've brought my own."'
Required
1 Calculate the overhead rate Hpital de Grasse charged on the cotton wool.
2 What criteria might Hpital de Grasse use to justify allocation of each of the overhead items
b to i in the preceding list? Examine each item separately and use the allocation criteria listed
in Exhibit5.2 in your answer.
3 What should McGarrigle do -about the 11.52 charge for the cotton wool?
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