Which center is primarily evaluated on return on assets and ROI?

Which center is primarily evaluated on return on assets and ROI?

• A. Cost center
• B. Profit center
• C. Investment center
• D. Revenue center

Answer: (C)

An investment center is evaluated on how effectively it uses the assets it controls to generate profit. Return on assets (ROA) and ROI are natural measures here because they combine profitability with the asset base the center manages. The manager has authority over both revenues and costs, as well as the investment in assets, so performance should reflect both profit earned and how efficiently those assets are deployed. Cost centers focus on controlling costs, not on asset utilisation. Revenue centers focus on generating revenue, not on asset efficiency. Profit centers generate profit but don’t have responsibility for the asset base used to produce that profit, so ROI/ROA isn’t the primary measure for them. Therefore, ROI and ROA are most appropriate for an investment center, which balances profit generation with asset management.

An investment center is evaluated on how effectively it uses the assets it controls to generate profit. Return on assets (ROA) and ROI are natural measures here because they combine profitability with the asset base the center manages. The manager has authority over both revenues and costs, as well as the investment in assets, so performance should reflect both profit earned and how efficiently those assets are deployed.

Cost centers focus on controlling costs, not on asset utilisation. Revenue centers focus on generating revenue, not on asset efficiency. Profit centers generate profit but don’t have responsibility for the asset base used to produce that profit, so ROI/ROA isn’t the primary measure for them. Therefore, ROI and ROA are most appropriate for an investment center, which balances profit generation with asset management.