A general contractor's annual workers' compensation premium is $48,000. If the contractor's payroll increases by 25%, and assuming the same rate classification, what will be the approximate new annual premium?
Correct Answer
D) $60,000
Workers' compensation premiums are typically calculated based on payroll. A 25% increase in payroll would result in a 25% increase in premium: $48,000 × 1.25 = $60,000.
Why This Is the Correct Answer
Workers' compensation premiums are directly proportional to payroll since they're calculated as a rate per $100 of payroll. When payroll increases by 25%, the premium increases by the same percentage. The calculation is straightforward: $48,000 × 1.25 = $60,000. This direct relationship exists because workers' compensation rates are applied uniformly across the same classification codes, making the premium calculation linear with payroll changes.
Why the Other Options Are Wrong
Option A: $54,000
$54,000 represents only a 12.5% increase ($48,000 × 1.125), which would be incorrect since the payroll increased by 25%. This underestimates the premium increase and doesn't reflect the direct proportional relationship between payroll and workers' compensation premiums.
Option B: $58,000
$58,000 represents approximately a 20.8% increase, which is less than the 25% payroll increase. This calculation error fails to recognize that workers' compensation premiums increase proportionally with payroll changes within the same rate classification.
Option C: $62,000
$62,000 represents approximately a 29.2% increase, which exceeds the 25% payroll increase. This overestimate suggests an incorrect understanding of how workers' compensation premiums are calculated, possibly confusing it with other insurance types that might have different calculation methods.
Memory Technique
Remember 'PAYROLL = PREMIUM' - Workers' compensation premiums move in lockstep with payroll. If payroll goes up 25%, premium goes up 25%. It's a direct 1:1 relationship.
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