A contractor employs 15 workers with an annual payroll of $750,000. If the workers' compensation rate is $8.50 per $100 of payroll, what is the annual workers' compensation premium?
Correct Answer
B) $63,750
Workers' compensation premium = ($750,000 ÷ $100) × $8.50 = 7,500 × $8.50 = $63,750. The rate is applied per $100 of payroll, so the payroll must be divided by 100 first.
Why This Is the Correct Answer
Option B is correct because workers' compensation premiums are calculated by dividing the total payroll by $100, then multiplying by the rate per $100. The calculation is ($750,000 ÷ $100) × $8.50 = 7,500 × $8.50 = $63,750. This method properly applies the rate structure used in workers' compensation insurance, where rates are expressed per hundred dollars of payroll.
Why the Other Options Are Wrong
Option A: $6,375
Option A ($6,375) is incorrect because it represents only 1/10th of the correct answer, likely resulting from an error in decimal placement or miscalculating the payroll divisor.
Option C: $85,000
Option C ($85,000) is incorrect because it appears to multiply the rate ($8.50) directly by some factor without properly dividing the payroll by $100 first.
Option D: $127,500
Option D ($127,500) is incorrect because it's too high, possibly resulting from multiplying the rate by the full payroll amount without the required division by $100.
Memory Technique
Remember 'Divide by 100, then Multiply' - think 'D before M' like 'December before May' in the alphabet to remember the order of operations.
Reference Hint
Look up workers' compensation insurance calculations in the Business and Finance chapter or Insurance section of your contractor reference manual.
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