Profit Centers

Profit Center-definition

When a responsibility center’s performance is

Measured in terms of profit, the center is called
Profit Center
 Introduction

Designate business units as profit centers

Delegate profit responsibility to lower
managers instead of top Managers
Fix their financial responsibility
Reward the best performing units
Application of PC approach
Dupont/ GM / GE/ Nokia etc
•Constraints on business unit authority
•Constraints from other business units
• Production / Marketing/ Procurement

•Constraints from corporate management

• Strategic decisions/ Uniformity /
economies of centralization
Other Functional Units as Profit Centers

•Marketing

•Manufacturing

•Service and Support units

 Measuring Profit

•Contribution Margin (Revenue – VC)

•Direct Profit (Revenue – All cost)
•Controllable Profit (excludes non controllable exp of HO)
•Income before Taxes (Sales – (CoGS+ Admin, S&D exp)
•Net Income (Bottom-line profit)
 Few Constraints

•Decentralized decision issues

•Top mgt rely on lower mgt for inform.
•Variation in quality of decisions
•Functional competition & frictions
•Additional cost because of additional mgt.
•Issues relating to transfer price, common costs,
• credit for revenue