A construction company has a $2.4 million annual payroll. Their workers' compensation experience modifier is 1.15. If the base rate is $12.75 per $100 of payroll, what is their annual premium?
Correct Answer
A) $351,900
Premium = ($2,400,000 ÷ $100) × $12.75 × 1.15 = 24,000 × $12.75 × 1.15 = $351,900
Why This Is the Correct Answer
The formula is: (Payroll ÷ 100) × Base Rate × Experience Modifier. Step 1: $2,400,000 ÷ 100 = 24,000 units. Step 2: 24,000 × $12.75 = $306,000 base premium. Step 3: $306,000 × 1.15 = $351,900. The experience modifier of 1.15 means this company has a worse-than-average claims history, so it pays 15% more than the base premium.
Why the Other Options Are Wrong
Option B: $306,000
$306,000 is the base premium before applying the experience modifier (24,000 × $12.75 = $306,000). This is the result if the student forgets to multiply by the 1.15 modifier — a very common calculation error.
Option C: $265,200
$265,200 would result from incorrectly dividing by the experience modifier instead of multiplying ($306,000 ÷ 1.15 ≈ $266,087) or from using a wrong payroll base. There is no scenario where dividing by the modifier is correct.
Option D: $428,400
$428,400 results from multiplying by a higher incorrect modifier or by misapplying the rate. For example, if someone used 1.40 as the modifier: $306,000 × 1.40 = $428,400. This reflects a common arithmetic error from misreading the modifier.
Memory Technique
The formula order is P-R-M: Payroll units (÷100), Rate (×base rate), Modifier (×experience mod). P-R-M gives you the PREMium. $2.4M → 24,000 units → ×$12.75 = $306,000 → ×1.15 = $351,900.
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