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Transition of Cost Centers to Profit Centers

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'Wireless Inc., provides a variety of telecommunications services to residential and commercial customers from its massive campus-like headquarters in suburban Orlando. For a number of years the firm's maintenance group has been organized as a cost center, rendering services free of charge to the company's user departments (sales, billing, accounting, marketing, research, and so forth). Requests for maintenance have grown considerably, and demand is approaching the point where quality and timeliness of services provided are becoming an issue. As a result, management is studying whether the maintenance operation should be converted from a cost center to a profit center, with users to be billed for services performed.'

I need help in answering the questions on the case study aforementioned:
a) Differentiate between a cost center and a profit center. How is each of these centers evaluated?

b) What will likely happen to the number of user service requests if the company makes the switch to a profit-center form of organization? Why?

c) Assume that a user department has requested a particular service, one that is time consuming and costly to perform. The maintenance group's actual cost incurred in providing this service is $17,800, and the user has agreed to pay $20,800 if the switch to a profit center is made. If this case is fairly typical within the firm, which of the two forms of organization (cost center or profit center) will result in a more responsive, service-oriented maintenance group for Wireless? Why?

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Solution Summary

The expert discusses the cost and profit centers.

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Solution:
a. Cost center can be defined as division or subunit of an organization which is responsible only for its costs, such as service department, accounting department, etc. On the other hand, profit centers are responsible for both revenues and costs, such as sales division. Profit centers are ...

Solution provided by:
Sheetal Jain, PGDM
Education
  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
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