Question

Stone Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $350 per month per employee.

Workers compensation insurance		5	%
Social security and Medicare (employees' share and employer's share combined)		15.3	%
Pension and other postretirement costs expense (paid by employer)		5	%
Personal income taxes withheld		10	%
Unemployment taxes expense		2	%

In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $350 per month per employee.

Assume that the federal government implements a 10% payroll tax upon employers to finance health insurance for all citizens and residents. Stone will pay this tax instead of purchasing group health insurance. This will cause Stone 's total annual payroll-related expenses to:

Select one:

a. Decrease by $15,000.

b. Increase by $15,000.

c. Decrease by $32,500.

d. No change, because payroll taxes are withheld from employees' pay.

Answer 1

Present annual group health insurance cost = 25*350*12 = $105000

Revised annual health insurance cost = 900000*10% = $90000

Change = 105000-90000 = $15000 Decrease

Option A Decrease by $15,000 is correct