Dave Merrill vacationed at Lake Tahoe last winter. Unfortunately, he broke his ankle while skiing and spent two days at the Sierra University Hospital. Merrill's insurance company received a $4,950 bill for his two-day stay.

One item that caught Merrill's attention was an $11.83 charge for a roll of cotton. Merrill is a salesman for Johnson & Johnson and knows that the cost to the hospital of the roll of cotton is between $2.40 to $3.20. He asked for a breakdown of the $11.83 charge. The accounting office of the hospital sent him the followinginformation:

a.Invoiced cost of cotton roll$2.60b.Cost of processing paperwork for purchase0.64c.Supplies-room management fee0.75d.Operating-room and patient-room handling costs1.67e.Administrative hospital costs1.11f.University teaching-related costs0.64g.Malpractice insurance costs1.25h.Cost of treating uninsured patients2.50i.Profit component0.66 Total$11.83

Merrill 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.'"

1.Compute the overhead rate Sierra University Hospital charged on the cotton roll. Begin by determining the formula, then calculate the overhead rate.2.What criteria might Sierra use to justify allocation of the overhead items b-i in the preceding list? Examine each item separately and match it to the appropriate criteria.3.What should Merrill do about the $11.83 charge for the cotton roll