A construction company has 15 employees with an annual payroll of $750,000. If the workers compensation rate is 8.5 per $100 of payroll, what is the annual workers compensation premium?
Correct Answer
D) $63,750
Workers compensation premium = ($750,000 ÷ $100) × $8.50 = 7,500 × $8.50 = $63,750. This calculation method is standard for determining workers compensation costs based on payroll and industry classification rates.
Why This Is the Correct Answer
The correct answer is A because workers compensation premiums are calculated by dividing the total payroll by $100, then multiplying by the rate per $100. With a $750,000 payroll and a rate of $8.50 per $100, the calculation is ($750,000 ÷ $100) × $8.50 = 7,500 × $8.50 = $63,750. This is the standard method used by insurance companies to determine workers compensation premiums based on payroll exposure.
Why the Other Options Are Wrong
Option A: $67,500
This answer ($67,500) is incorrect because it appears to use a rate of $9.00 per $100 instead of the given $8.50 rate, significantly overstating the premium cost.
Option B: $65,250
This answer ($71,250) is incorrect because it appears to use a rate of $9.50 per $100 instead of the given $8.50 rate, resulting in the highest and most inaccurate premium calculation.
Option C: $71,250
This answer ($65,250) is incorrect because it appears to use a rate of $8.70 per $100 instead of the given $8.50 rate, resulting in an inflated premium calculation.
Memory Technique
Remember 'Divide by 100, then Multiply' - use the acronym 'DM' like 'Direct Message' to recall the two-step process for workers comp calculations.
Reference Hint
Look up workers compensation insurance calculations in the Business and Finance Management chapter, specifically the section on insurance cost calculations and payroll-based premiums.
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