Final answer:
Performance evaluation of a profit center is typically based on its segment margin, which shows the profit or loss by subtracting directly attributable costs from revenues for that segment.
Step-by-step explanation:
The performance evaluation of a profit center is usually based on its segment margin. This is the amount of profit or loss generated by a part of the business. It is calculated by deducting the variable and directly attributable fixed costs from the revenue generated by the segment. For example, if a profit center earns revenues of $20,000 and has variable costs of $15,000, the contribution to the coverage of fixed costs and profit is $5,000, which can be considered part of the segment margin. It is important because it shows the potential profitability of each part of a business and helps managers make decisions about whether a particular segment should continue, expand, or be discontinued. Unlike return on investment (ROI) or return on assets (ROA), which take into account the assets used by the segment, segment margin is focused solely on income and expenses directly related to the segment's operations.