Q)Under which situation creation of profit center is not advisable. Describe inherent difficulties in creation of Profit centers?

The main problems occurs when profit units deal with one another. It is useful to think of managing profit centre in terms of control over three types of decisions : The product decision, The marketing decision, The procurement or the sourcing decision.

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Greater degree of integration within a company, the more difficult it becomes to assign responsibility to a single profit centre for all three activities in a given product line. 3/12/13

Difficulties in creation of Profit Centers

Decentralized decision rely on management control reports. If headquarters management is better than the average profit centre manager. Friction increases of arguments over the appropriate transfer price, the assignment of common sales, and the credit for revenues.

Organization units once cooperated as financial units competes with one another . 3/12/13

Difficulties in creation of Profit Centers

Divisionalization may impose additional cost . Competent general managers may not exist in a functional organization. Too much emphasis on short run profitability at the expense of long run profitability.

No satisfactory system for ensuring that optimizing the profits of each individual profit center. 3/12/13