What is a Profit Center?
A profit center is a part of a company that directly adds to its profits.
How Does a Profit Center Work?
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 Does a Profit Center Matter?
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.