Thanks for looking at this Joe.
The size of the drop targets are not the issue from my perspective.
Looking at it a little closer, it seems where there are inherited includelets, no new drop targets are created as they are for uninherited includelets.

i.e. if 'FAQ' were not grey, it would be possible to drop 'Documents' directly between 'Content Item' and 'FAQ'.

Ideally the available drop targets would be independent of inheritance.