A contractor's annual payroll is $1.2 million with a workers' compensation rate of $12.75 per $100 of payroll. If they receive a 15% experience modification factor discount, what is their adjusted annual premium?
Correct Answer
B) $130,050
Base premium: ($1,200,000 ÷ $100) × $12.75 = $153,000. With 15% discount: $153,000 × 0.85 = $130,050. The experience modification factor reduces premiums for contractors with good safety records.
Why This Is the Correct Answer
The calculation correctly follows the two-step process for workers' compensation premium calculation. First, the base premium is calculated by dividing the annual payroll by $100 and multiplying by the rate: ($1,200,000 ÷ $100) × $12.75 = $153,000. Then the experience modification factor discount is applied: $153,000 × 0.85 = $130,050. The 15% discount means paying 85% of the base premium.
Why the Other Options Are Wrong
Option A: $175,950
This amount would result from incorrectly adding 15% to the base premium instead of subtracting it. The calculation would be $153,000 × 1.15 = $175,950, which represents a penalty rather than the discount described in the problem.
Option C: $191,250
This amount appears to be calculated using an incorrect rate or methodology. It doesn't correspond to either the base premium calculation or any logical application of the experience modification factor to the given payroll and rate.
Memory Technique
Remember 'Base Before Bonus' - always calculate the base premium first, then apply any experience modification factors or discounts as a multiplier in the second step.
Reference Hint
Florida Building Code, Business and Finance chapter, or Workers' Compensation Insurance section - look for premium calculation methods and experience modification factors
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