A contractor's workers compensation insurance premium is calculated at $8.50 per $100 of payroll. If the monthly payroll is $125,000, what is the monthly workers compensation premium?
Correct Answer
B) $10,625
The premium is calculated as ($125,000 ÷ $100) × $8.50 = 1,250 × $8.50 = $10,625. Workers compensation rates are typically expressed per $100 of payroll and vary by classification code.
Why This Is the Correct Answer
Option C is correct because workers compensation premiums are calculated by dividing the total payroll by $100, then multiplying by the rate per $100. The calculation is ($125,000 ÷ $100) × $8.50 = 1,250 × $8.50 = $10,625. This standard formula ensures premiums are proportional to payroll exposure and reflects the industry practice of expressing rates per $100 of wages.
Why the Other Options Are Wrong
Option A: $8,500
Option D ($12,750) appears to result from multiplying $125,000 by a rate of $10.20 per $100, which uses an incorrect premium rate rather than the given $8.50 rate.
Option D: $9,625
Option B ($9,625) results from an error in the calculation process, possibly from incorrectly handling the decimal places or using an wrong intermediate step in the multiplication.
Memory Technique
Remember 'Divide by 100, then Multiply' - think 'D100M' - this prevents the common error of multiplying the rate directly by the total payroll amount.
Reference Hint
Florida Building Contractor Reference Manual - Chapter on Insurance Requirements and Workers Compensation, or Business and Finance Law section covering contractor insurance obligations.
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