What is a 'Profit Center'
A 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.
BREAKING DOWN 'Profit Center'Profit centers function as ways for businesses to internally separate certain revenue-generating activities from others, allowing for more individual analysis as well as cross-comparison. This can assist in determining the future allocation of available resources, as well as help in making determinations if certain activities should be cut entirely.
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.
Profit Centers and Resource Allocation
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.
Examples of Profit Centers within Specific Businesses
While most reports regarding the profitability of activities at Walmart focus on the business as a whole, certain activities could be divided into profit centers for analysis. For example, clothing could be considered one profit center, while home goods could be a second one. Additionally, departments that rotate on a seasonal basis, such as the garden center or sections relating to holiday décor, can be examined as profit centers to separate the seasonal contribution of these departments from those with year-round appeal.
Microsoft may choose to separate the funds produced from the sale of its Windows operating system from that of other software suites, such as Microsoft Office, or other hardware sectors, such as the X-Box gaming console. This allows overall profitability of differing products to be examined and correlated based on associated cost and revenue comparisons.
Profit Centers Versus Cost Centers
While profit centers are operated in the hope of bringing in revenue, cost centers are not associated with the direct generation of profits. This can include various support departments, such as IT support or accounting, that are critical to business functions, but do not hold specific responsibilities regarding profit generation.