Definition
Profit center refers to a company's division that directly contributes to or is expected to contribute to the overall business bottom line. Each profit center is treated as a distinct, standalone business that is responsible for revenue generation. The profits and losses coming out of each profit center are separately calculated.
Example
For instance, a company's profit center can be its sales department. It uses company resources such as staff salaries, utilities, and rent, to generate revenues through sales. Company management would commonly analyze department-wise performance as well as the whole company's performance. Just like a company, individual profit centers are evaluated based on the revenues they generate versus the costs they incur during a period. The net income of every profit center matters to the top management.
Why it matters
Analysing profit centers tells companies which of their business units are profitable and which are not. Profit centre performance analysis gives a more accurate picture of company-wide performance and allows cross-comparison among business units. It also allows companies to easily determine future allocation of resources among units based on revenue expectations from each.