Profit and Cost Centers

Many businesses have both Profit and Cost Centers. In a Profit Center, Sales minus your VC-Variable Costs-equals your CM-Contribution Margin. CM less your Controllable FC-Fixed Costs-such as Depreciation, Insurance, Rent, etc-equals your Controllable Margin. The Controllable Margin divided by your Average Operating Assets-such as Property, Plant and Equipment-equals your ROI-Return on Investment. The CM Ratio or Percentage equals the CM divided by your Unit Cost. Example: Unit Cost: $100; VC: $70; CM = $30; therefore, your CM Ratio or Percentage is $30/$100 = 30%.

REQUIRED: List TWO examples of both Profit and Cost Centers…that’s all!

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You are involved in deciding capital expenditures. This category can include a new website for $300,000, a new machine for $900,000 or new plant for $10 million. Analysis is done using ‘3’ methods: the Payback Method, and the ‘2’ discounted Cash Flow Methods: the Net Present Value Method, and the Internal Rate of Return Method. The discounted Cash Flow Methods are preferred, due to them being more accurate using the ‘time value’ of money.

REQUIRED: The numbers using the discounted Cash Flow Methods are positive. What other factors/variables will enter into your recommendation/decision?