Startup, Inc. provides a variety of telecommunications services to residential and commercial customers from its massive campus-like headquarters in suburban Tampa. 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.Required: A. Differentiate between a cost center and a profit center. How is

Question

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 Startup? Why?

What will be an ideal response?

Answer 1

A. Cost centers and profit centers are different types of responsibility units within an organization. With a cost center, a manager is held accountable for the amount of cost incurred; in contrast, with a profit center, managers are evaluated on the amount of profit generated, namely, revenues minus expenses.
B. The number of service requests is likely to drop because users will now be charged for services provided. In cases where services are free, users sometimes use and abuse the privilege.
C. The profit center form of organization will probably result in a more service-oriented maintenance group. The profit-center manager would be willing to perform services as long as capacity is available and revenues exceed expenses. Naturally, the added profit is viewed favorably, and the quality of services may actually increase. On the other hand, if organized as a cost center, providing additional service will likely result in higher costs, which could be viewed unfavorably in performance evaluations.