Which term describes clearly identifiable autonomous divisions of an organization for which both costs and revenues can be worked out?

Which term describes clearly identifiable autonomous divisions of an organization for which both costs and revenues can be worked out?

• A. Profit Centers
• B. Cost Centers
• C. Contribution
• D. Fixed Costs

Answer: (A)

The question tests how subunits within a company are evaluated on profitability. A profit center is an autonomous part of the business that has its own revenues and its own costs, so its profit can be calculated and used to judge performance. This makes it the right concept when you want to measure how well a division contributes to overall profitability, not just how efficiently it controls costs. In contrast, a cost center focuses only on costs and efficiency, without accounting for any revenues its activities generate. Fixed costs are the costs that don’t vary with output and aren’t tied to evaluating a particular unit’s profitability. Contribution relates to the difference between sales and variable costs and is used in CVP analysis rather than identifying a subunit with its own profit and loss. For example, a regional store with separate sales and expenses can be evaluated as a profit center.

The question tests how subunits within a company are evaluated on profitability. A profit center is an autonomous part of the business that has its own revenues and its own costs, so its profit can be calculated and used to judge performance. This makes it the right concept when you want to measure how well a division contributes to overall profitability, not just how efficiently it controls costs.

In contrast, a cost center focuses only on costs and efficiency, without accounting for any revenues its activities generate. Fixed costs are the costs that don’t vary with output and aren’t tied to evaluating a particular unit’s profitability. Contribution relates to the difference between sales and variable costs and is used in CVP analysis rather than identifying a subunit with its own profit and loss. For example, a regional store with separate sales and expenses can be evaluated as a profit center.