A contractor is working on a project where the total contract amount is $180,000. If workers compensation insurance costs 6.8% of total labor costs, and labor represents 65% of the contract, what is the workers compensation premium?
Correct Answer
B) $7,956
Labor costs = $180,000 × 0.65 = $117,000; Workers comp premium = $117,000 × 0.068 = $7,956
Why This Is the Correct Answer
Step 1: Calculate labor costs = $180,000 × 0.65 = $117,000. Step 2: Calculate workers comp premium = $117,000 × 0.068 = $7,956. Workers comp rates are always applied to labor costs only, not to the total contract amount.
Why the Other Options Are Wrong
Option A: $11,700
$11,700 results from applying the 6.8% rate directly to the full contract amount ($180,000 × 0.065 = $11,700) or a similar miscalculation — this skips the labor cost step and incorrectly bases the premium on total contract value.
Option C: $12,240
$12,240 results from applying 6.8% to the full contract amount ($180,000 × 0.068 = $12,240) — a common error of ignoring the labor percentage and calculating premium on the entire contract.
Option D: $8,568
$8,568 likely results from using an incorrect labor percentage or rate, such as $180,000 × 0.70 × 0.068 = $8,568, substituting 70% for labor instead of the stated 65%.
Memory Technique
Two-step calculation: first find LABOR (contract × labor%), then find PREMIUM (labor × rate%). Think of it as peeling an onion — you must get to the labor layer before applying the insurance rate.
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