A construction company has annual payroll of $2,500,000 and a workers compensation rate of $8.50 per $100 of payroll. What is the annual workers compensation premium?
Correct Answer
A) $212,500
Workers compensation premium = (Payroll ÷ 100) × Rate = ($2,500,000 ÷ 100) × $8.50 = 25,000 × $8.50 = $212,500.
Why This Is the Correct Answer
The correct answer is A) $212,500. Workers compensation premiums are calculated by dividing the annual payroll by 100, then multiplying by the rate per $100 of payroll. This standardized calculation method ensures consistent premium calculations across the industry. The formula correctly accounts for the rate being expressed per $100 of payroll rather than per dollar.
Why the Other Options Are Wrong
Option B: $21,250
Option B ($21,250) is incorrect because it represents the result of dividing the correct answer by 10, suggesting an error in decimal placement or misunderstanding of the rate calculation.
Option C: $85,000
Option C ($85,000) is incorrect because it appears to be the result of multiplying the payroll directly by the rate ($2,500,000 × 0.0034), which ignores the 'per $100' basis of the rate calculation.
Option D: $294,118
Option D ($294,118) is incorrect because it represents an inflated calculation that doesn't follow the standard workers compensation premium formula, possibly from adding incorrect percentages or fees.
Memory Technique
Remember 'Divide by 100, then Multiply' - think 'D100M' - this prevents the common error of multiplying the rate directly against the full payroll amount.
Reference Hint
Florida Building Construction Standards - Chapter on Insurance Requirements and Workers Compensation, or Business and Finance section covering insurance calculations
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