A contractor's workers compensation insurance has a rate of $8.50 per $100 of payroll for a specific classification. If the annual payroll for this classification is $240,000, what is the annual workers compensation premium?
Correct Answer
B) $20,400
Workers compensation premium = (Payroll ÷ 100) × Rate. ($240,000 ÷ 100) × $8.50 = 2,400 × $8.50 = $20,400.
Why This Is the Correct Answer
The correct answer is A ($20,400) because workers compensation premiums are calculated by dividing the annual payroll by 100, then multiplying by the rate per $100 of payroll. With a payroll of $240,000 and a rate of $8.50 per $100, the calculation is ($240,000 ÷ 100) × $8.50 = 2,400 × $8.50 = $20,400. This is the standard formula used throughout the construction industry for workers compensation premium calculations.
Why the Other Options Are Wrong
Option A: $19,200
Option D ($19,200) is incorrect because it's close to but not equal to the correct answer. This could result from using an incorrect rate (like $8.00 instead of $8.50) or making a computational error in the multiplication step.
Option C: $28,235
Option B ($2,040) is incorrect because it appears to be the result of dividing the correct answer by 10, possibly from a calculation error where someone forgot to multiply by the full rate or made a decimal place error in the computation.
Memory Technique
Remember 'Divide by 100, then Multiply' - think 'D100M' for workers comp calculations. The rate is always 'per $100 of payroll' so you must first find how many $100 units you have.
Reference Hint
Look up workers compensation insurance calculations in the Business and Finance chapter, specifically the section on insurance premium calculations and payroll-based insurance costs.
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