Sales Mix Variance

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, sales mix is the composition/combination or proportion of each product and services that a company plans to sale during the period.  Every product has different clients with differing demand elasticity.. Therefore, the profitability also varies from one product to another. Moreover, each product may not be giving the same level of contribution or profit. All Companies budget for the sales of each product or service separately for a specific period of time. And upon consolidation of these individual sales budget we get the total sales budget. 

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 an 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

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 into an intense marketing and publicity campaign for promoting 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 pen 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 overall level is favorable for the company by $14400. It will benefit from this variance and the company will see a rise in turnover as well as profitability.

Sales Mix 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 demand pattern of the products and services of the company. If the demand of the product with a higher profit margin increases, the company will experience a favorable SMV. On the other hand, a steep fall in the demand of 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 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 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 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 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.

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 take 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 correct estimation of revenue and profit figures that a business can achieve over a period of time.

Push and Incentivization

If somehow high contribution product is not moving as per the demand. It can be either the sales team is not putting enough efforts. 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 hand hold this product by offering incentives across the channel and consumers to create a push for that particular product.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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