Sales mix is the proportion of individual product sales compared to total sales, used to determine profitability and budget. Variance analysis helps determine reasons for profit or loss, while external factors can affect the mix.
A sales mix represents the individual sales of each product sold by a company compared to total sales. Businesses often track this information to determine how much money they profit or can earn from selling a variety of goods or services. The mix of goods often affects a company’s budget.
For example, a company might sell two different products: widgets and gear. During the past month, the company sold 300 widgets and 700 sprockets. The sales mix is 30% widgets and 70% gears.
Most companies try to determine the popularity of goods or services sold through the sales mix process. A company’s budget typically starts with how many units of a good or service the company expects to sell. The expected total sales multiplied by the selling price is the starting point for cash generated from normal operations. From here, the company will list its expenses and other costs to produce a certain level of sales. Most companies will experience different sales numbers based on the company’s mix of goods and services.
Variance analysis is another use of the company’s sales mix. A basic variance calculation is the product’s actual sales minus expected sales – known as budgeted sales. Companies will multiply this figure by the individual merchandise gross profit and determine how much profit was lost or gained. This analysis helps companies determine specific reasons why they lost or made more money than expected. Completing this variance calculation for each product in the mix helps the company focus its attention on a specific area of the company.
Adding product to the current sales mix is another objective for this calculation. For example, the company that sells widgets and gears – at 30 and 70% respectively – might decide that it also wants to sell plugs. Adding plugs to the sales mix is likely to drive sales away from widgets and gears. Decreased sales on these units will need to be replaced by selling plugs. Using variance analysis, the company can determine whether the plugs will sell enough to cover the expected decline in sales in other areas.
External factors can also affect a company’s product mix. Consumer income may drop, resulting in lower sales. Substitutes offered by a competitor may adversely affect a company’s sales of goods or services. Increased taxes or government regulations can result in higher operating costs and lower profits. Each of these factors and more can result in the need for an external analysis to determine changes to a successful sales mix.
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