A contractor has 15 employees with a total annual payroll of $750,000. The workers' compensation rate for their classification is $8.50 per $100 of payroll. What is the annual workers' compensation premium?
Correct Answer
A) $63,750
The premium is calculated as (Payroll ÷ 100) × Rate = ($750,000 ÷ 100) × $8.50 = 7,500 × $8.50 = $63,750. This represents the annual workers' compensation insurance cost.
Why This Is the Correct Answer
The workers' compensation premium calculation follows the standard industry formula where the rate is applied per $100 of payroll. With a total payroll of $750,000 and a rate of $8.50 per $100, we divide the payroll by 100 to get 7,500 units, then multiply by the rate of $8.50 to get $63,750. This represents the annual premium the contractor must pay for workers' compensation insurance coverage.
Why the Other Options Are Wrong
Option B: $8,824
This answer of $8,824 seems to result from an incorrect calculation method, possibly from trying to divide the rate by the payroll or using an improper formula that doesn't follow the standard per-$100-of-payroll structure.
Option C: $6,375
This answer of $88,235 is significantly higher than the correct amount and likely results from multiplying the payroll by the rate directly ($750,000 × $8.50) without dividing by 100 first, which ignores the 'per $100 of payroll' specification.
Option D: $88,235
This answer of $6,375 appears to be the result of incorrectly dividing the correct answer by 10, possibly from a calculation error where someone forgot to account for the full payroll amount or misplaced a decimal point in the computation.
Memory Technique
Remember 'Divide by 100, then Multiply' - the workers' comp rate is always per $100 of payroll, so you must first convert your total payroll into $100 increments before applying the rate.
Reference Hint
Look up workers' compensation insurance calculations in the Business and Finance Management chapter, specifically the section on insurance premium calculations and payroll-based rates.
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