A construction company has 15 employees with a total annual payroll of $750,000. If the workers compensation rate is 8.5 per $100 of payroll, what is the annual premium?
Correct Answer
B) $63,750
Premium = ($750,000 ÷ $100) × 8.5 = 7,500 × 8.5 = $63,750
Why This Is the Correct Answer
Option B is correct. The formula is: (Total Payroll ÷ $100) × Rate = Premium. ($750,000 ÷ $100) × 8.5 = 7,500 × 8.5 = $63,750. The number of employees (15) is irrelevant to this calculation — premiums are based on payroll dollars, not headcount.
Why the Other Options Are Wrong
Option A: $637.50
Option A ($637.50) results from dividing by $1,000 instead of $100, or otherwise misplacing the decimal point. This is a factor-of-100 error: $750,000 ÷ $1,000 = 750; 750 × $0.85 = $637.50.
Option C: $6,375
Option C ($6,375) is off by a factor of 10 — it equals $63,750 ÷ 10. This could result from dividing the payroll by $1,000 and using 8.5 (instead of per $100), or another decimal placement error during computation.
Option D: $63.75
Option D ($63.75) is off by a factor of 1,000 from the correct answer. This extreme decimal error could result from treating the rate as 8.5 per $10,000 of payroll or similar gross misplacement of decimals.
Memory Technique
The formula is always: (Payroll / 100) × Rate. Think of it as: 'How many $100 chunks are in the payroll? Multiply that count by the rate.' For $750,000 payroll: 7,500 chunks × $8.50 each = $63,750.
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