Profit Center

[Md. Al-Amin]

Profit Center

A profit center is a part of a company that directly adds to its profits.

How it works/Example:

A company may have a variety of distinct departments, divisions, or operating groups, each with separate responsibilities and each contributing to the overall success of a company.  Cost centers, for example, such as accounting, auditing, or inventory control, have costs, but do not contribute revenues.  As a result, they do not produce profits.  A profit center, on the other hand, is directly involved in producing revenues, and, if it is managed well, its revenues exceed its costs and it produces a profit.

Why it Matters:

A profit center must be carefully managed to ensure that the sales generating activities lead to more revenues than the cost of those activities, thus producing a profit.  Creating separate profit centers within a company allow the management to evaluate the profitability of each unit or business activity.   When assessing a company, it is useful for an investor to classify various components of a business into cost and profit centers, allowing the investor to evaluate the prospects of various divisions on a stand-alone or restructured basis and the allocation or elimination of the costs found in the cost centers.

http://www.investinganswers.com/financial-dictionary/businesses-corporations/profit-center-644

[munna99185]

Profit center is a branch or division of a company that is accounted for on a standalone basis for the purposes of profit calculation. A profit center is responsible for generating its own results and earnings, and as such, its managers generally have decision-making authority related to product pricing and operating expenses. Profit centers are crucial in determining which units are the most and least profitable within an organization. The concept of profit centers enables a company's executives and management to determine how best to focus its resources to maximize profitability. In order to optimize profits, management may decide to allocate more resources to highly profitable areas, while reducing allocations to less profitable or loss-making units. Not all units within an organization can be tracked as profit centers. This is especially applicable to departments that provide an essential service within an organization, but do not generate their own revenues. Some examples of these include the research department within a broker-dealer, the administration arm of a company, and a unit that provides after-sales support in an organization. [Source: http://www.investopedia.com]

Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University