A Michigan contractor operates as an LLC with 3 employees. The annual workers' compensation premium is $4,800, paid in 12 monthly installments. If the contractor adds 2 more employees mid-year, increasing the premium by 35%, what will be the adjusted monthly payment for the remaining 6 months?
Correct Answer
A) $540
Original monthly payment: $4,800 ÷ 12 = $400. New annual premium: $4,800 × 1.35 = $6,480. New monthly payment: $6,480 ÷ 12 = $540.
Why This Is the Correct Answer
Step 1: Original monthly payment = $4,800 ÷ 12 = $400. Step 2: New annual premium = $4,800 × 1.35 = $6,480. Step 3: New monthly payment = $6,480 ÷ 12 = $540. The question asks for the new monthly payment based on the adjusted annual premium spread over 12 months — not over just the 6 remaining months. The answer is $540.
Why the Other Options Are Wrong
Option B: $648
$648 would result from an incorrect calculation — for example, taking the 35% increase and applying it only to the remaining 6 months' worth of payments ($400 × 6 = $2,400; $2,400 × 1.35 = $3,240; $3,240 ÷ 5 = $648). This misapplies the premium increase to the wrong base period.
Option C: $840
$840 is too high and would result from a compounding or double-counting error — for example, applying the 35% increase on top of already-adjusted figures, or miscalculating the new annual premium as significantly higher than $6,480.
Option D: $400
$400 is the original monthly payment before any employees were added. Selecting this answer means ignoring the premium increase entirely. It represents the starting calculation but fails to apply the 35% increase to the annual premium.
Memory Technique
Two steps: (1) Find the new annual premium (old × 1.35), then (2) divide by 12 for the new monthly rate. Don't divide by remaining months — insurance installments are based on the full 12-month cycle even when changes happen mid-year.
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