A contractor's workers compensation rate is $8.50 per $100 of payroll for a classification with annual payroll of $250,000. What is the annual workers compensation premium?
Correct Answer
A) $21,250
Workers compensation premium = (Payroll ÷ $100) × Rate. ($250,000 ÷ $100) × $8.50 = 2,500 × $8.50 = $21,250.
Why This Is the Correct Answer
The workers compensation premium calculation follows the standard formula used in the construction industry. The rate of $8.50 per $100 of payroll means for every $100 in wages paid, the premium is $8.50. With an annual payroll of $250,000, you divide by $100 to get 2,500 units, then multiply by the rate of $8.50 to get $21,250. This represents 8.5% of the total payroll, which is typical for workers compensation premiums.
Why the Other Options Are Wrong
Option C: $212,500
This answer of $8,500 appears to come from incorrectly multiplying the rate ($8.50) by 1,000 instead of properly applying the per-$100-of-payroll formula.
Option D: $2,125
This answer of $212,500 is far too high and likely results from multiplying the payroll by the rate directly without dividing by $100 first, essentially treating it as $8.50 per $1 instead of per $100.
Memory Technique
Remember 'Divide by 100, then Multiply' - the acronym 'DM' can remind you of the two-step process: Divide payroll by 100, then Multiply by the rate.
Reference Hint
Look up workers compensation insurance calculations in the Business and Finance Management chapter, specifically the section on insurance costs and premium calculations.
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