An Arizona contractor with 8 employees has a payroll of $320,000. If the workers compensation rate increases from $3.75 to $4.10 per $100 of payroll, what is the annual premium increase?
Correct Answer
B) $1,120
Rate increase = $4.10 - $3.75 = $0.35 per $100. Premium increase = ($320,000 ÷ $100) × $0.35 = 3,200 × $0.35 = $1,120
Why This Is the Correct Answer
The rate increase is $4.10 − $3.75 = $0.35 per $100 of payroll. Payroll units: $320,000 ÷ $100 = 3,200 units. Premium increase: 3,200 × $0.35 = $1,120. Only the incremental rate change is used — not the full new rate — to calculate the increase.
Why the Other Options Are Wrong
Option A: $1,320
$1,320 results from an arithmetic error, possibly using a $0.4125 or similar incorrect rate differential, or miscalculating payroll units.
Option C: $1,220
$1,220 is off by $100 from the correct answer. This may result from rounding errors or incorrectly computing the rate differential (e.g., using $0.3813 instead of $0.35).
Option D: $1,020
$1,020 understates the premium increase, possibly from using a smaller rate differential or an error in payroll unit calculation.
Memory Technique
Workers' comp premium formula: (Payroll ÷ 100) × Rate. For increases, isolate the rate change first: $4.10 − $3.75 = $0.35. Then: ($320,000 ÷ 100) × $0.35 = 3,200 × $0.35 = $1,120. The '8 employees' figure is bait — ignore it.
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