Sales Mix

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What is Sales Mix?

Sales Mix is the share of various products or services to be sold in business concerning its total sales and is one of the key decisions to be taken because demand and profitability vary from one product/service to another. Therefore, this mix needs to be identified for efficient business operations to maximize revenue and profitability.

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Explanation

AB Sells two types of Cool drinks (Drink X and Drink Y). So the company can sell both the products equally, or it can sell Drink X 70% and Drink Y 30%. Deciding the right proportion of the sales mix is a strategic decision.

This plays an important role in deciding the future of the business (i.e.) which products/services should be given priority, where the focus of the business should be, Short term Vs. Long-term profitability, market, demand for the product, etc.

The management analyzes continuously concerning changing market conditions, demand for the products in the market, Production capacity, availability of raw materials, and profitability of the various products, and it creates a direct impact on the business performance, choosing the right sales mix is a crucial decision for the business growth and sustainability.

Sales Mix Formula

The cost and profitability of each product need to be identified to find the optimal mix.

Profit = Sale Price of the Product (-) Cost of the Product Profit % = Profit Per Unit / Sales Value Per Unit

Example

XY Corp, a car dealer, sells the following types of Car:

Sales Mix Example 1

The above mentioned is the Sales Mix of XY Corp. They sell More of the Nissan Versa because that is the low-cost car, and the demand is more for that car in the market. Therefore, the profit from the low-cost car will be less in terms of monetary value. They also sell Kia Forte, a costlier car that yields more profit, but there is not much demand for that car. This has to be decided based on the demand in the market, production capacity, profitability of the product, etc.

Sales Mix Variance

Sales Mix

This variance analysis helps the management understand the reasons for deviation from the budgeted sales mix and reconsider their decisions. In addition, it helps to understand the performance of various products concerning sales and profitability and each product's contribution to the business.

Formula

Sales Mix Variance Formula = (Actual Sales Mix - Budgeted Sales Mix) * Budgeted Units Sold * Budgeted Contribution Margin

  • The actual Sales Mix is the actual performance of every product concerning the business's total sales.
  • The budgeted sales Mix is the ratio of products concerning the total budgeted sales at the beginning of the period.

Example

A company sells products A and B with an actual sales mix of 40:60. They produce 2000 units per year. The budgeted mix is 60:40. The contribution margin for product A is $10 per unit, and for product, B is $8 per unit.

Sales Variance:

  • Product A: (600-900) * 10 = -3000 (Unfavourable Variance)
  • Product B: (900-600) * 8 = 2400 (Favourable Variance)
  • Total Sales Mix Variance = -600 (Unfavourable Variance)

It indicates that the actual mix doesn't yield profitable results as budgeted. Therefore, management needs to relook the sales mix and the variance for better performance.

Importance

  • It is one of the important decisions to be made for a business that sells more than one product, as it helps the management channel the resources based on the demand and profitability of the products.
  • Individual product performances can be analyzed based on which the sales mix can be fixed.
  • It helps the management fix the budget and target revenue and profitability.

Advantages

  • A wide range of products and services can be provided to the customer.
  • Different products will have demand in the market; the revenue and profitability can be improved by choosing the right sales mix.
  • The customer base can be improved by offering various products and services.
  • This analysis helps management understand the product-wise performance and contribution to the business.

Disadvantages

  • More manpower and specialization is required while dealing with various product lines.
  • More workforce and specialization are required while dealing with various product lines.
  • Any issue with one product can damage the overall reputation of the business.
  • Handling and managing multiple product lines comes at a huge cost.
  • All products produced by the company need not be successful. Another product can erode the margins generated by one product.

Conclusion

Sales Mix is one of the vital decisions taken by the business management. It needs to be chosen to sustain in the market and improve financial performance. Handling multiple product lines can be both favorable and unfavorable at times, depending on the market conditions, customer needs, the economy in the country, etc. Therefore, it needs to be monitored continuously, and it shall be altered from time to time by analyzing the individual product contribution.