A subcontractor's workers compensation policy costs $18,000 annually for a payroll of $400,000. If the payroll increases to $520,000, what will be the new annual premium cost?
Correct Answer
B) $23,400
Rate = $18,000 ÷ ($400,000 ÷ $100) = $18,000 ÷ 4,000 = $4.50 per $100. New premium = ($520,000 ÷ $100) × $4.50 = 5,200 × $4.50 = $23,400
Why This Is the Correct Answer
Option B ($23,400) is correct. Step 1: Find the rate per $100 of payroll. Rate = $18,000 ÷ ($400,000 ÷ 100) = $18,000 ÷ 4,000 = $4.50 per $100. Step 2: Apply rate to new payroll. New premium = ($520,000 ÷ 100) × $4.50 = 5,200 × $4.50 = $23,400.
Why the Other Options Are Wrong
Option A: $22,400
$22,400 results from an arithmetic error, such as applying a rate of $4.31 per $100 or incorrectly computing the payroll units. The correct rate derived from the given data is $4.50 per $100, which yields $23,400.
Option C: $25,400
$25,400 results from a calculation error, possibly from applying an inflated rate or incorrectly adding the payroll increase. The correct step-by-step calculation yields $23,400.
Option D: $24,400
$24,400 results from a miscalculation, such as rounding the rate incorrectly or using the wrong payroll figure. The precise calculation with $4.50 per $100 on $520,000 payroll gives $23,400.
Memory Technique
Two-step workers' comp formula: (1) Find rate: Existing Premium ÷ (Existing Payroll ÷ 100). (2) Apply rate: (New Payroll ÷ 100) × Rate. Write this formula on your scratch paper before starting any WC premium calculation.
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