Sales mix is essential because in some organizations some products or services may be more profitable than others, and if there are significant changes in the sales mix of a company then the profit changes accordingly. Managing the sales mix is essential to maintain the profitability of the organization.
Sales mix considers every item that a company sells and the profit margin that is earned from every item. When every product has a different profit margin, the entire profitability of all the elements combined is considered in the sales mix. With the help of the sales mix, an organization determines if the product should receive the priority and focus. The decisions are made on the earning capacity, the resources used and the demand in the market for the product.
Most of the times, the profitability overall seems to be fine, but which product is performing better would be a question. Sales mix offers clear visibility to the management as to which product gets more profit percentage and which is underperforming. Based on the decisions, the company can decide whether to continue a product in the market or to make any changes in the product to increase its profitability.
When the company realizes that a specific product is not getting enough profits, they can always ask for suggestions from the customers. Customer feedback, together with research and market intelligence team, can revamp the product and get it working in the market. Internal decisions such as more incentives for an underperforming product, discounts and offers for less profitable products are also accomplished by the company so that it can boost the sales.
Example: Consider that you sell 3 different types of books – A, B and C. The previous month sale was $20,000, and there is a 25% profitability overall. While the profit margin is good, you can think of improving the existing profit margin if you take a look at the items separately to determine the cost of every book.
Sales Mix Formula
To analyze the product-wise sales makes you have to understand the contribution and the cost of every item. For example, you need to look at what is the purchasing cost of the individual books and compare them with the sale price of every book.
Consider the following two formulas:
Profit = Sales Price – Cost price
Profit Margin = Profit / Sales Price
When Book A which costs $10, is sold for $13.34
Profit = Sales Price – Cost Price
Profit = 13.34 – 10
Profit = $3.34
Sales Margin = Profit / Sales Price
Sales Margin = 3.34 / 13.34
Sales Margin = 25%
Now let’s take Book B which costs $9 and is sold for $12.50
Profit of Book B: $3.5
Sales Margin = 28%
Therefore you can find out that the book makes a higher profit of 28% while booking a mix of this profit of 25%. Thus, the books are there needs to work on revamping the sales of book A.
Sales Mix Variance
Sales mix variance is the measure of the change in profitability to the variation in the ratio of different products from the available standard sales mix.
Sales Mix Variance (standard costing)
= (Total units sold – Unit Sales at Std mix) x Per unit Std profit
Sales Mix Variance (with Marginal costing)
= (Actual sale of Units – Unit sales at Std mix) x Std contribution per unit
Sales volume variance has to sub-variance known as sales quantity variance and sales mix variance. Along with sales volume variants, sales mix variance should be used for calculation with standard profit per unit when the cases of absorption costing and standard contribution per unit should be used when the instances of marginal costing.
Example of Sales Mix
Business Inc. is a medium scale company which specializes in manufacturing of certain products A and B.
The budgeted sales of Product A are 1600 units, and product B are 2400 units for last year. The standard variable cost of per unit of product a and B were set at $1500 and $750 respectively
The sales team of business think they managed to sell 3700 units of product B and 1300 units of product the last year.
1. Calculation of standard mix ratio
Std Mix Ratio: 40% and 60% of product A and B respectively.
(1600) / (1600 + 2400) = 40%
And the remaining 60% is of Product B.
2. Calculation of sales quantity in the proportion of the standard mix
Total sales of A and B = 1300 + 3700 = 5000
Product A = 40% of 5000 = 2000 units
Product B = 3000 units
3. Calculation of difference in Actual sales quantities and Sales quantities in Std Mix
Actual sales of Product A and B = 1300 & 3700
Unit sales of Product A and B = 2000 and 3000
The difference is 700 adverse for Product A and 700 favourable for product B.
4. Calculation of standard contribution per unit
Revenue of Product A & B = $2500 and $1000
Variable cost of Product A & B = ($1500) and ($750)
Std contribution per unit = $1000 and $250
5. Calculation of Variance
For product A Variance = $1000 x 700 units = $700,000 Adverse
For Product B variance = $250 x 700 = $175,000 favorable
Sales Mix Variance = 700,000 – 175,000 = 525,000 adverse
Favourable sales mix various means that more profitable products were sold at a higher proportion and adversaries mix variance means that the margin products were sold in high proportion for the given period.
Reasons for favourable Sales Mix Variance
- There is an increase in demand from the market for high margin products
- There is a concentration of efforts from the sales and marketing department towards these more profitable products
- The supply of less valuable products is reduced due to which the focus has shifted on more profitable products
- The supply in the more profitable products has increased because of multiple factors like the addition of production capacity
Reasons for Adverse Sales Mix Variance
- There is a decrease in the production of high margin products due to which the supply is reduced
- The demand for more profitable products has diminished.
- There is an increase in amount and or demand for these useful products
- The sales and marketing efforts are not focused due to multiple reasons for the performance of more profitable products. These reasons could be a misalignment of incentives, lack of sales commission, misalignment between sales and marketing department