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

centre 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?