A contractor's workers' comp policy shows a $500,000 payroll with an experience modification factor of 1.15 and base rate of $12.50 per $100 of payroll. What is the annual premium?
Correct Answer
B) $71,875
Premium = (Payroll ÷ 100) × Base Rate × Experience Mod = ($500,000 ÷ 100) × $12.50 × 1.15 = 5,000 × $12.50 × 1.15 = $71,875
Why This Is the Correct Answer
The workers' comp premium formula is: (Payroll ÷ 100) × Base Rate × Experience Modification Factor. Calculation: ($500,000 ÷ 100) = 5,000 units × $12.50 = $62,500 base premium × 1.15 mod factor = $71,875. This is the correct annual premium.
Why the Other Options Are Wrong
Option A: $62,500
$62,500 is the base premium before applying the experience modification factor. Students who forget to multiply by the mod factor (1.15) will arrive at this incorrect answer.
Option C: $78,125
$78,125 may result from applying an incorrect modification factor or using $500,000 × $12.50 ÷ 100 × 1.25 instead of 1.15, or from a mathematical error in the calculation sequence.
Option D: $83,250
$83,250 does not correspond to any correct application of the given formula and figures. It may result from multiplying the full payroll by the rate without dividing by 100, or other calculation errors.
Memory Technique
Workers' comp premium = 'Payroll Pennies × Rate × Modifier.' Step 1: Convert payroll to 'hundreds' ($500,000 ÷ 100 = 5,000). Step 2: Multiply by rate (5,000 × $12.50 = $62,500). Step 3: Apply the mod (× 1.15 = $71,875). Never skip step 3 — the experience mod is the exam's favorite trap.
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