A roofing contractor employs 12 workers and has an annual payroll of $480,000. If the workers' compensation rate is $8.75 per $100 of payroll, what is the annual workers' compensation premium?
Correct Answer
A) $42,000
Annual premium = ($480,000 ÷ $100) × $8.75 = 4,800 × $8.75 = $42,000
Why This Is the Correct Answer
Workers' compensation premiums are calculated by dividing total payroll by $100 and multiplying by the rate per $100. Calculation: $480,000 ÷ $100 = 4,800 units. Premium = 4,800 × $8.75 = $42,000. The number of employees (12 workers) is given as contextual information but is not used in the premium calculation — workers' comp premiums are payroll-based, not headcount-based.
Why the Other Options Are Wrong
Option B: $38,400
$38,400 does not result from the correct formula. One way to arrive near this figure would be using an incorrect rate (e.g., $8.00 per $100: 4,800 × $8.00 = $38,400), suggesting the test-taker used the wrong rate or made an arithmetic error in the multiplication step.
Option C: $48,000
$48,000 results from using a rate of $10.00 per $100 (4,800 × $10.00 = $48,000), or from multiplying the payroll by $8.75 without first dividing by $100 in some calculation path. This is a common magnitude error when candidates forget that the rate is per $100, not per dollar of payroll.
Option D: $45,600
$45,600 results from using an incorrect rate of approximately $9.50 per $100, or from a calculation error in handling the decimal. None of the given information produces this figure through correct application of the standard workers' comp formula.
Memory Technique
Workers' comp formula: 'Payroll divided by 100, times the rate.' Think of it as: for every $100 of payroll you pay, you owe the rate amount in insurance. $480,000 payroll = 4,800 'hundreds' of payroll. 4,800 × $8.75 = $42,000. The 12 workers? A red herring — ignore headcount for premium calculations.
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