Profit Center

AAA

DEFINITION of 'Profit Center'

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.

INVESTOPEDIA EXPLAINS 'Profit Center'

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.

RELATED TERMS
  1. Investment Center

    A business unit that can utilize capital to directly contribute ...
  2. Revenue

    The amount of money that a company actually receives during a ...
  3. Expense

    1. The economic costs that a business incurs through its operations ...
  4. Conglomerate

    A corporation that is made up of a number of different, seemingly ...
  5. Investment Income Ratio

    The ratio of an insurance company’s net investment income to ...
  6. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
RELATED FAQS
  1. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  2. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>
  3. How is the marginal cost of production used to find an optimum production level?

    The marginal cost of production can be tracked to show the optimal production level where per-unit production cost is lowest ... Read Full Answer >>
  4. What factors make it difficult to compare performance ratios between retail stocks?

    Companies that operate in the retail sector significantly differ in terms of their profitability and efficiency, making stock ... Read Full Answer >>
  5. How do investors interpret the same store sales ratio when analyzing food and beverage ...

    When an investor interprets the same-store sales ratio in analyzing food and beverage stocks, he looks at the monthly same-store ... Read Full Answer >>
  6. What profit margin is usual for a company in the retail sector?

    Some retail subsectors, such as high-end clothing and personal care retailers, can have famously high gross profit margins, ... Read Full Answer >>
Related Articles
  1. Insurance

    Evaluating The Board Of Directors

    Corporate structure can tell you a lot about a company's potential. Learn more here.
  2. Investing Basics

    How And Why Do Companies Pay Dividends?

    If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
  3. Fundamental Analysis

    Interpreting A Company's IPO Prospectus Report

    Learn to decipher the secret language of the IPO prospectus report - it can tell you a lot about a company's future.
  4. Markets

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  5. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  6. Trading Strategies

    Pros And Cons Of Paper Trading

    Most market novices should paper trade for a considerable amount of time, despite key drawbacks.
  7. Investing

    Is There Still Opportunity in Japanese Stocks?

    Japanese stocks’ strong performance has prompted market watchers to question whether there’s still a case for adding exposure to the Land of the Rising Sun
  8. Investing Basics

    What Private Investors Can Learn from 'The Profit'

    By watching "The Profit" investors can pick up a simple yet solid framework for investing in privately-held businesses.
  9. Trading Strategies

    Choose Abundance and Manage Your Trades Like A Pro

    Professional traders build skills to last a lifetime, not just through the next rally or selloff. Cultivate the psychology and skills that make a successful trader.
  10. Stock Analysis

    Is PayPal Worth More Than eBay?

    Examine the online payment processor, PayPal, and discover its projected value increase as a standalone company, separate from eBay.

You May Also Like

Hot Definitions
  1. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  2. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  3. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  4. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  5. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  6. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!