Posted in Marketing and Strategy Terms, Total Reads: 443
Definition: Sales Mix
Sales mix is the approximate proportion of the various products that are sold. A sales mix is crucial because a company’s products are likely to vary in profitability. The company needs to focus on overall profit by trying to maximize the profit.
In many cases, each good or service that a firm provides has a different profit, so changes in sales mix generally result in differing amounts of profit from period to period. Therefore, if a company launches a new product that has a low profit margin, and which it sells aggressively, it is quite possible that profits will decline even as total sales increase. On the contrary, if a company chooses to drop a low-margin product line and instead push sales of a higher-margin product line, total profits can actually increase even as total sales decline.
A cost accounting variance known as sales mix variance helps in understanding the gap between the actual sales mix and planned sales mix.
Sales Mix Variance for standard costing:
= [Actual Unit Sold - Unit Sales at Standard Mix] x Standard Profit per Unit
Sales mix variance quantifies the change the proportion of various products sold as compared to the initial set budget.
Reasons for good sales mix variance
1. To concentrate towards selling the more profitable products having higher profit margin while maintaining the minimum acceptable profit from the other products.
2. Increase the supply of profitable products by improving the profit capacity.
3. Decreasing the supply of less profitable products.
4. Increase the demand of higher profit margin products.
The company needs to understand its constraints while changing the sales mix to get the maximum profit.