A contractor's workers compensation insurance has a rate of $8.50 per $100 of payroll for a specific classification. If the annual payroll for this classification is $240,000, what is the annual workers compensation premium?
Correct Answer
A) $20,400
Workers compensation premium = (Payroll ÷ 100) × Rate. ($240,000 ÷ 100) × $8.50 = 2,400 × $8.50 = $20,400.
Why This Is the Correct Answer
The correct answer is A ($20,400) because workers compensation premiums are calculated by dividing the annual payroll by 100, then multiplying by the rate per $100 of payroll. With a payroll of $240,000 and a rate of $8.50 per $100, the calculation is ($240,000 ÷ 100) × $8.50 = 2,400 × $8.50 = $20,400. This is the standard formula used throughout the construction industry for workers compensation premium calculations.
Why the Other Options Are Wrong
Option B: $2,040
Option B ($2,040) is incorrect because it appears to be the result of dividing the correct answer by 10, possibly from a calculation error where someone forgot to multiply by the full rate or made a decimal place error in the computation.
Option C: $28,235
Option C ($28,235) is incorrect because it's significantly higher than the correct calculation and doesn't follow the standard workers compensation premium formula. This may result from using an incorrect rate or adding unnecessary factors to the calculation.
Option D: $19,200
Option D ($19,200) is incorrect because it's close to but not equal to the correct answer. This could result from using an incorrect rate (like $8.00 instead of $8.50) or making a computational error in the multiplication step.
Memory Technique
Remember 'Divide by 100, then Multiply' - think 'D100M' for workers comp calculations. The rate is always 'per $100 of payroll' so you must first find how many $100 units you have.
Reference Hint
Look up workers compensation insurance calculations in the Business and Finance chapter, specifically the section on insurance premium calculations and payroll-based insurance costs.
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