# Profit Center vs. Cost Center: Key Differences & Examples for Businesses

![Profit Center](https://www.investopedia.com/thmb/NstH0MMksAuUcael7jWpbNrlrfM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/profitcentre.asp_Final-ad846c59a8c64f2ca0771d3224e95094.png)

*— Investopedia / Dennis Madamba*

> **Definition**
>
> A profit center is a company division or branch that is responsible for generating its own revenues and profits, often treated as a separate entity within the organization for financial analysis.

## What Is a Profit Center?

A profit center is a part of a company that generates revenue and contributes to its profit. It operates like a standalone business, with managers who make pricing and expense decisions to maximize earnings. Unlike cost centers, which track costs and don’t make money, profit centers are responsible for both revenue and profits. Examples of profit centers include specific divisions or product lines at companies like Walmart and Microsoft.

### Key Takeaways:

*   A profit center adds directly to a company's profitability and is accounted for like a standalone business.  
    
*   Profit centers help identify the most and least profitable units within an organization for better resource allocation.  
    
*   Managers of profit centers have authority over pricing and expenses to ensure profitability.  
    
*   Cost centers, unlike profit centers, provide essential services without generating revenue, such as human resources or IT support.  
    
*   Real-world examples of profit centers include Walmart's different departments and Microsoft's hardware and software units.

## Analyzing the Role of Profit Centers in Business

Profit centers help identify which parts of a company are most or least profitable. They highlight different revenue-generating activities for better analysis and comparison among divisions. This analysis aids decisions on resource allocation and whether to discontinue certain activities. As an example, they may investigate the [customer financing arm](https://www.investopedia.com/terms/i/investment-center.asp) of the business to see if it is creating the necessary profit.

Managers of profit centers control pricing and expenses. They must ensure sales exceed costs, maintaining profits by boosting revenue, cutting expenses, or both.

### Comparing Profit Centers and Cost Centers

Not all organizational units are profit centers. Some, like research departments in [broker-dealers](https://www.investopedia.com/terms/b/broker-dealer.asp) or HR in law firms, provide essential services without generating revenue. These are called [cost centers](https://www.investopedia.com/terms/c/cost-center.asp).

Profit centers aim to generate revenue, while cost centers do not directly create profits. Cost centers include support departments like IT, HR, and customer service, essential for operations but not revenue-focused.

## Practical Examples of Profit Centers in Action

At the retailer Walmart, different departments selling different products could be divided into profit centers for analysis. For example, clothing could be considered one profit center while home goods could be a second profit center. In addition, departments that rotate on a seasonal basis, such as the garden center or sections relating to holiday decor, can be examined as profit centers to separate these departments' seasonal contribution from those with a year-round contribution.

The computer giant Microsoft has a wide variety of profit centers ranging from hardware to software to digital services. In analyzing these large revenue sources, the company 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 Xbox gaming console. This allows the [profitability](https://www.investopedia.com/ask/answers/012715/what-difference-between-profitability-and-profit.asp) of different products to be examined and correlated based on associated cost and revenue comparisons.

The concept of a profit center is a framework to facilitate optimal resource allocation and profitability. To optimize profits, management may decide to allocate more resources to highly profitable areas while reducing allocations to less profitable or loss-inducing units.

## The Bottom Line

A profit center is the part of a company that directly contributes to its profits by generating revenue, unlike cost centers, which support operations but don’t make money. Profit centers allocate resources to the most profitable areas, and their managers make decisions about pricing and expenses to boost earnings. Companies like Walmart and Microsoft treat specific departments or product lines as profit centers to guide strategic financial decisions.