A contractor has 15 employees with a total 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
The calculation is: ($750,000 ÷ $100) × $8.50 = 7,500 × $8.50 = $63,750. Workers' compensation rates are typically expressed per $100 of payroll, so the total payroll must be divided by 100 before multiplying by the rate.
Why This Is the Correct Answer
The correct answer is A) $63,750. Workers' compensation premiums are calculated by dividing the total payroll by $100 (since rates are expressed per $100 of payroll), then multiplying by the given rate. The calculation is ($750,000 ÷ $100) × $8.50 = 7,500 × $8.50 = $63,750. This represents the annual premium the contractor must pay for workers' compensation insurance coverage.
Why the Other Options Are Wrong
Option A: $6,375
This answer results from incorrectly dividing the correct answer by 10, likely from a calculation error in handling the decimal places or misunderstanding the rate application.
Option D: $8,500
This answer appears to be the rate ($8.50) multiplied by 1,000, which doesn't follow the proper workers' compensation premium calculation formula.
Memory Technique
Remember 'Divide by 100, then Multiply' - think 'D100M' when you see workers' comp rates expressed 'per $100 of payroll'.
Reference Hint
Look up workers' compensation insurance calculations in the Business and Finance chapter, specifically the section on insurance premium calculations and payroll-based premiums.
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