A contractor employs 15 workers and pays $680,000 in annual wages. If the workers' compensation rate is $3.75 per $100 of payroll, and there's a 15% experience modification factor increase, what is the total annual premium?
Correct Answer
D) $29,325
Base premium: ($680,000 ÷ $100) × $3.75 = $25,500. With 15% increase: $25,500 × 1.15 = $29,325
Why This Is the Correct Answer
Step 1 — Calculate the base premium: $680,000 ÷ $100 = 6,800 units × $3.75 = $25,500. Step 2 — Apply the 15% experience modification factor increase: $25,500 × 1.15 = $29,325. The experience modification factor (EMR) adjusts the base premium upward (bad claims history) or downward (good claims history). A 15% increase means the contractor pays 115% of the base rate.
Why the Other Options Are Wrong
Option A: $25,500
$25,500 is the correct base premium before applying the experience modification factor. A candidate who stops here forgets to apply the 15% EMR adjustment.
Option B: $22,950
$22,950 would result from applying a 10% reduction rather than a 15% increase. This error reflects confusing a rate decrease with a rate increase.
Option C: $27,625
$27,625 results from an arithmetic error — likely applying 8.3% or a similar incorrect modifier. Double-check: $25,500 × 0.15 = $3,825; $25,500 + $3,825 = $29,325.
Memory Technique
Two-step rule: First = Base Rate (payroll ÷ 100 × rate). Second = Multiply by (1 + modification). A 15% increase = multiply by 1.15. Never add a percentage directly to a dollar amount — always convert it to a multiplier first.
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