What do we mean by Sales Mix Variance?
Sales mix variance is the difference between the sales mix of the company actually sold and the sales mix the company has budgeted over a fixed period of time or for the period under review. A company may be selling a single product or can be selling multiple products. Sales mix variance occurs when the company has multiple products and services. Thus, the sales mix is the composition/combination or proportion of each product and service that a company plans to sell during the period. Every product has different clients with differing demand elasticity. Therefore, the profitability also varies from one product to another.
Sales mix variance is an important metric for organizations because it gives an idea to the management about how individual products affect the company’s profitability. The companies can strategize and focus more on those products and product lines that are more profitable. Also, they can channelize the resources into higher production of those products that are seeing increased demand. Similarly, they can lower the production of those products that are seeing a fall in demand over a period of time.
A company can have a favorable sales mix variance in case the revenue from the actual sales mix exceeds the revenue from the sales mix as per the budget. The company will have an unfavorable sales mix variance if the revenue from the actual sales mix is lesser than that of the sales mix as per the budget.
How do we Calculate Sales Mix Variance?
The formula for calculation of SMV is as follows:
SMV= {Actual number of units a company sells x (Sales mix % actually achieved – Sales mix % as per the budget)} x Contribution margin per unit as per the budget
Also Read: Sales Quantity Variance
The contribution margin per unit is the difference between the selling price of a product and the variable costs per unit of the product. Let us understand the above formula with the help of an example.
Example
XYZ Pens Manufacturing Co. manufactures and sells two types of pens- a budget category pen A and a premium pen B. The company has a sales budget of selling 8000 units of pen A and 2000 units of pen B every month. Hence, the ratio of sales of both pens is 80:20 as per the budget. The contribution margin per unit of pen A is $2 and pen B is $10.
The company engages in an intense marketing and publicity campaign to promote its premium segment pen B. The profit margins are higher in the premium category and the company wants to benefit from that. As a result, the sale of pen A falls to 6000 units per month whereas the sale of pen B rises to 6000 units per month. Hence, the current ratio of sales of pens A to B becomes 50:50.
The Sales mix variance for pen A=
SMV for A= {6000 units x (50% – 80%)}x $2
= $3600 unfavorable
We will calculate the SMV for pen B as:
SMV for B= {6000 units x (50% – 20%)} x $10
=$18000 favorable
Total Sales Variance for the Company= $-3600+$18000=$14400.
Therefore, we see that the Sales mix variance in the above case at the overall level is favorable for the company by $14400. It will benefit from this variance and the company will see a rise in turnover and profitability.
Also Read: Sales Price Variance
Why does Sales Mix Variance Occur?
Sales mix variance or SMV can occur because of the following factors:
Demand-Side Factors
The foremost reason for the occurrence of SMV is the change in the demand pattern of the products and services of the company. If the demand for the product with a higher profit margin increases, the company will experience a favorable SMV. On the other hand, a steep fall in demand for a product with high-profit margins will result in an unfavorable SMV.
The demand for products out of a product line can change due to a number of reasons. Factors such as the availability of new products with better technology, development of substitutes, changes in consumer tastes and preferences, pricing, seasonal variations, etc., affect the demand. A positive marketing and publicity campaign for products with higher margins can also lead to an increase in demand for those products. This will result in a favorable SMV. The opposite can happen if a competitor adopts a similar strong marketing campaign. The demand for our products will fall, resulting in an unfavorable SMV.
Supply-Side Variations
A company may face sudden supply shocks that may result in a lower supply of a particular product or some products from a product line. If the supply of a product is less, its sales will automatically get affected. This will result in Sales mix variance.
The supply of a product may have a negative impact due to reasons such as unavailability of raw materials, problems with labor supply, power outages, machine failures, etc. A supply-side failure of a product with high-profit margins will lead to unfavorable sales mix variance. However, it may happen that a supply-side failure of a very low-margin product can result in an increase in demand for other products of the company with higher profit margins. This will cause a favorable sales mix variance for the company and be beneficial for it.
Refer to Sales Value Variance for learning about other types of sales variances.
What is the Importance of Sales Mix Variance?
SMV is important for organizations because of the following reasons-
Proper Channelizing of Resources
SMV is very important for companies that sell multiple products and services. It helps the management to effectively plan and channelize the resources towards the products that show a favorable variance consistently over a period of time. The management can also make a decision to curtail funding. They can allocate lesser resources towards the products that cause an unfavorable variance over time. They can also decide to discontinue them from the product line permanently.
Budget Preparation
SMV helps the management in making an optimum sales budget as per the present business situation. They can create and set a new sales mix as per the variance observed over time. Of course, the budget has to be in line with the current demand scenario. This will help in the correct estimation of revenue and profit figures that a business can achieve over a period of time.
Push and Incentivization
Suppose somehow a high contribution product is not moving as per the demand. It can be either the sales team is not putting enough effort. Or it may need some sort of incentivization to attract the customers, dealers, and field staff. The variance can give an insight to the Management where they can handhold this product by offering incentives across the channel and consumers to create a push for that particular product.
