Sales Mix

What is Sales Mix?

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

Explanation

AB Sells two types of Cool drinks (Drink X and Drink Y). So the company can sell both the products in equal, 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 profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more, market, and demand for the product, etc.

It is analyzed by the Management on a continuous basis with respect to changing market conditions, demand for the products in the market, Production capacity, availability of raw materials, 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 in order 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 Nissan Versa because that is the low-cost car, and the demand is more for that car in the market. The profit from the low-cost car will be less in terms of monetary value. They also sell Kia Forte, which is a costlier car that yields more profit, but there is not much demand for that car in the market. This has to be decided based on the demand in the market, production capacity, profitability of the product, etc.

Sales Mix Variance

Sales Mix

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For eg:
Source: Sales Mix (wallstreetmojo.com)

This variance analysisVariance AnalysisVariance analysis is the process of identifying and analyzing the difference between the standard numbers that a company expects to accomplish and the actual numbers that they achieve, in order to help the firm analyze positive or negative consequences.read more helps the management to understand the reasons for deviation from the budgeted sales mix and to reconsider their decisions. It helps to understand the performance of various products with respect to sales and profitability and each product’s contribution towards the business.

Formula

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

  • Actual Sales Mix is the actual performance of every product with respect to the total sales of the business.
  • Budgeted sales Mix is the ratio of products with respect to 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 a 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. Management needs to relook the sales mix and the variance for better performance.

Importance

Advantages

  • A wide range of products and services can be provided to the customer.
  • Different products will have its own 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 to understand the product-wise performance and contribution to the business.

Disadvantages

  • More manpower and specialization is 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. The margins generated by one product can be eroded by another product.

Conclusion

Sales Mix is one of the vital decisions taken by the management of the business. 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. It needs to monitor on a continuous basis, and it shall be altered from time to time by analyzing the individual product contribution.

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