Under Alabama workers compensation law, a roofing contractor with 8 employees has a total payroll of $320,000. If the rate for roofing work is $12.50 per $100 of payroll, what is the annual premium?
Correct Answer
B) $40,000
Premium = (Payroll ÷ 100) × Rate = ($320,000 ÷ 100) × $12.50 = 3,200 × $12.50 = $40,000.
Why This Is the Correct Answer
The formula is: Premium = (Payroll ÷ 100) × Rate. Applying the numbers: ($320,000 ÷ 100) × $12.50 = 3,200 × $12.50 = $40,000. The number of employees (8) is not used in this calculation — only total payroll and the rate per $100 of payroll matter.
Why the Other Options Are Wrong
Option A: $50,000
$50,000 results from applying an incorrect rate or miscalculating the payroll units. For example, using a rate of approximately $15.63 per $100 would yield $50,000 — that rate does not apply here.
Option C: $32,000
$32,000 results from multiplying $320,000 × 10% (or $10 per $100), incorrectly using a rate of $10.00 instead of $12.50. This is a common calculation error from misreading the rate.
Option D: $42,500
$42,500 could result from including an incorrect adjustment factor or applying the rate to a slightly different payroll figure. No standard calculation from the given data produces this number.
Memory Technique
Use the formula: Payroll ÷ 100 × Rate. Think of it as: 'How many $100 units are in the payroll? Multiply that count by the rate.' $320,000 has 3,200 units of $100. 3,200 × $12.50 = $40,000.
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