A Michigan contractor has 12 employees with a total annual payroll of $480,000. If the workers' compensation rate is 6.2% and there's a 15% experience modification factor discount, what is the annual premium?
Correct Answer
D) $25,296
Base premium = $480,000 × 6.2% = $29,760. With 15% discount: $29,760 × 0.85 = $25,296.
Why This Is the Correct Answer
Option D ($25,296) is correct. Step 1 — calculate the base premium: $480,000 × 6.2% = $29,760. Step 2 — apply the 15% experience modification discount: $29,760 × (1 − 0.15) = $29,760 × 0.85 = $25,296.
Why the Other Options Are Wrong
Option A: $34,224
Option A ($34,224) results from applying the rate and then adding 15% instead of subtracting it ($29,760 × 1.15 = $34,224). A 'discount' reduces the premium; confusing it with a surcharge leads to this error.
Option B: $35,000
Option B ($35,000) is a rounded approximation with no mathematical basis from the given data. It does not reflect either the correct base premium or the experience modification factor calculation.
Option C: $29,760
Option C ($29,760) is the correct base premium before applying the experience modification factor but does not reflect the 15% discount that the problem specifies. Stopping here misses the final step.
Memory Technique
Two-step process: Base × Rate = Base Premium, then Base Premium × (1 − Discount%) = Final Premium. Think of it as 'earn a discount, pay less' — a discount always reduces, so use (1 − discount rate).
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