- Define a revenue center, a cost center, a profit center, and an investment center. Give an example of each type of center.
A revenue center is a division or a unit of a company which produces sales or revenues for the company through the products or services which they sell or render. An example of a revenue center is the food and beverage department of a beach resort.
A cost center is a unit in an organization which is responsible for the costs and not revenue generation. Its contribution to the company’s profitability is indirect. Example of a cost center is the advertising division of a company.
A profit center is a department or unit of a company which is directly responsible to contributing to the profitability of the firm. An example of a profit center is the sales division of a company.
An investment center is a unit or division of a company which uses capital to directly contribute to the profitability of the firm. This center has control over revenues, costs and investment funds. Usually an investment center’s performance is assessed through the return on investment (ROI). A corporate division of a large multinational company located in a different country is an example of an investment center.
- Harrison Handbags
The additional profit that the company will expect from the proposed increase in advertising budget is $8,000. Please see attached Excel file for the computations.
- Brent Bybee (Please refer to the attached Excel file)
Memo to: Brent Bybee
The assessment of the performance of the Packaging Department for the month of April shows that the expenses for supplies, maintenance and utilities are all within budget, which is very commendable. However, it is noticed that your department has gone over the budget for labor and materials. Although the labor cost is only two percent over the budget, I would like to know the reason behind this. What is quite alarming though is the materials expense which is over the budget by 36%. The difference is quite high and I would like to get an explanation from you why the actual figure is way above the budget. I would like to find out whether there was too much material wastage and why it is so. If the increase in the cost of materials is due to an increase in production volume, then it is admissible. If not, then I hope that next month this difference will be eliminated because it will severely affect the company’s profits.
Please schedule an appointment with my secretary so we can discuss the above matters.
- Holman and Sons
As part of the management team of Leavitt Lumber, if I used ROI as a performance measure, I will accept the investment opportunity because the expected ROI to be generated from the project is 16% which meets the minimum requirement of 15%. Using residual income as a performance measure, I will accept the investment opportunity because it has a residual income of $150,000 in 2010. All these figures show that the project is profitable for Leavitt.
AllBusiness.com, Inc. (2012). Investment center. Retrieved from allbusiness.com: http://www.allbusiness.com/glossaries/investment-center/4944180-1.html#axzz2FU7PsCEU
Businessdictionary.com. (2012). Revenue center. Retrieved from businessdictionary.com: http://www.businessdictionary.com/definition/revenue-center.html
Investopedia US. (2012). Cost center. Retrieved from investopedia.com: http://www.investopedia.com/terms/c/cost-center.asp#axzz2FU5fIO1t
Investopedia US. (2012). Investment center. Retrieved from investopedia.com: http://www.investopedia.com/terms/i/investment-center.asp#axzz2FU5fIO1t