A contractor has 8 employees with a total annual payroll of $320,000. If the workers compensation rate is $3.50 per $100 of payroll, what is the annual premium?
Correct Answer
A) $11,200
Premium = (Payroll ÷ 100) × Rate = ($320,000 ÷ 100) × $3.50 = 3,200 × $3.50 = $11,200.
Why This Is the Correct Answer
Option A ($11,200) is correct. The workers' comp premium formula is: (Total Payroll ÷ 100) × Rate per $100. Calculation: ($320,000 ÷ 100) × $3.50 = 3,200 × $3.50 = $11,200. The number of employees (8) is irrelevant to this calculation — premiums are based on total payroll, not headcount.
Why the Other Options Are Wrong
Option B: $16,800
$16,800 results from applying the wrong divisor or rate. For example, dividing $320,000 by a smaller number inflates the units, or using a higher rate like $5.25 per $100 would yield this figure. The correct calculation with $3.50 per $100 gives $11,200.
Option C: $14,400
$14,400 results from a calculation error, possibly dividing payroll by 100 incorrectly or applying a rate of $4.50 instead of $3.50. The given rate of $3.50 per $100 on $320,000 payroll clearly yields $11,200.
Option D: $9,800
$9,800 is too low and results from using an incorrect rate (approximately $3.06 per $100) or an incorrect payroll figure. No plausible arithmetic path from the given data yields this answer.
Memory Technique
Workers' comp premium = (Payroll ÷ 100) × Rate. The number of employees is a red herring — ignore it. Only two numbers matter: total payroll and the rate per $100. Write the formula first, plug in only the relevant numbers.
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