Return Shipping and Handling

We sell a large product that typically costs about $50 to ship. We offer free shipping to the continental US. We decided to add Alaska at the default $9.99 shipping rate and experiment with one order before making adjustments, even if we took a hit on revenue.

It ended up costing $160 to ship. Lesson learned and we made adjustments. 29 days later and the buyer submitted a return request. They said it wasn't hot enough (it's a container that burns diesel) no electrical component. A prepaid label was generated for $9.99 and charged to our account. I am assuming we will be charged an additional $150+ once they ship it. This will have us breaking even. If we then refund them in full this order will have cost us over $300. I believe we can charge a 50% restocking fee if they return a used item that's full of ash/fuel. Is that correct? And is it correct that we cannot charge them the return shipping price? Any other thoughts that may help now or in the future?