A contractor's workers compensation premium is calculated at $3.50 per $100 of payroll for a specific class code. If the annual payroll for this classification is $850,000, what is the workers compensation premium?
Correct Answer
A) $29,750
Premium calculation: ($850,000 ÷ $100) × $3.50 = 8,500 × $3.50 = $29,750. Workers compensation premiums are typically calculated per $100 of payroll.
Why This Is the Correct Answer
Workers compensation premiums are calculated by dividing the total payroll by $100, then multiplying by the rate per $100. The calculation is ($850,000 ÷ $100) × $3.50 = 8,500 × $3.50 = $29,750. This standardized method allows insurance companies to quote rates consistently across different payroll amounts. The per-$100 basis is the industry standard for workers compensation premium calculations.
Why the Other Options Are Wrong
Option B: $31,500
This answer ($24,250) would result from using an incorrect rate of approximately $2.85 per $100 instead of the given $3.50 rate, or from a calculation error in the multiplication step.
Option D: $24,250
This answer ($35,000) is too high and likely results from incorrectly applying the rate, possibly multiplying $850,000 by 0.035 instead of properly dividing by $100 first.
Memory Technique
Remember 'Divide then Multiply' - always divide the payroll by 100 first to get your units, then multiply by the rate. Think 'D before M' like 'Dawn before Morning.'
Reference Hint
Look up workers compensation insurance calculations in the Business and Finance chapter, specifically the section on insurance premium calculations and payroll-based premiums.
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