Sales mix is the proportion of different products and services that comprise the total sales of a company. Sales mix is a key issue in businesses that sell products with differing profit levels, since a change in the mix of product sold can trigger a change in net profits, even when total sales remain approximately the same from period to period.
In many cases, each product or service that a company provides has a different profit, so changes in sales mix (even if sales levels remain the same) usually result in differing amounts of profit from period to period. Thus, if a company introduces a new product that has a low profit, and which it sells aggressively, it is quite possible that profits will decline even as total sales increase. Conversely, if a company elects to drop a low-profit product line and instead push sales of a higher-profit product line, total profits can actually increase even as total sales decline.
One of the best ways for a company to improve its profits in a low-growth market where increases in market share are difficult to obtain is to use its marketing and sales activities to alter the sales mix in favor of those products having the largest amount of profit associated with them.
When adjusting the sales mix, it is of considerable importance to understand the impact on the company constraint. Some products require more bottleneck time than others, and so may leave little room for the production of additional units.
Sales managers have to be aware of sales mix when they devise commission plans for the sales staff, since the intent should be to incentivize the sales staff to sell high-profit items. Otherwise, a poorly-constructed commission plan could push the sales staff in the direction of selling the wrong products, which alters the sales mix and results in lower profits.
A cost accounting variance called sales mix variance is used to measure the difference in unit volumes in the actual sales mix from the planned sales mix. Follow these steps to calculate it at the individual product level:
- Subtract budgeted unit volume from actual unit volume and multiply by the standard contribution margin
- Do the same for each of the products sold
- Aggregate this information to arrive at the sales mix variance for the company
The formula is:
(Actual unit sales - Budgeted unit sales) x Budgeted contribution margin
Sales Mix Variance Example
ABC International expects to sell 100 blue widgets, which have a contribution margin of $12 per unit, but actually sells only 80 units. Also, ABC expects to sell 400 green widgets, which have a contribution margin of $6, but actually sells 500 units. The sales mix variance is:
Blue widget: (80 actual units - 100 budgeted units) x $12 contribution margin = -$240
Green widget: (500 actual units - 400 budgeted units) x $6 contribution margin = $600
Thus, the aggregate sales mix variance is $360, which reflects a large increase in the sales volume of a product having a lower contribution margin, combined with a decline in sales for a product that has a higher contribution margin.