Cost-Volume-Profit (CVP)

Sales Mix

The products and services that make up a company's total sales will affect how it structures its sales cost centers.

A company's sales mix is the number of different products or services that make up its total sales. Usually, different products and services vary in terms of their individual profitability. Therefore, adjusting a company's sales mix can change its net profit even when its total sales remain unchanged.

Understanding sales mix can help companies maximize their profitability and growth, as companies can change their sales mix to correlate with demand. For example, when a company has a poorly performing product, it can decrease or eliminate the product's presence in the sales mix and focus on the more profitable products.

When a company adjusts its sales mix, that action can affect other costs. For example, if a company's sales mix consists of 50% televisions and 50% sound bars and it decides to adjust its sales mix to 75% televisions and 25% sound bars, its inventory costs will likely increase. The cost of stocking televisions—a typically more expensive and physically larger product—will increase inventory costs and cash investment. A company with a sales mix of three products—for example, televisions, sound bars, and remote controls—faces an even more complex situation.

Sales Mix Example

Television Sound Bar Total
Percentage of Total Sales 75% 25% 100%
Sales ($) $1,125,000 $375,000 $1,500,000
Variable Costs $620,000 $175,000 $795,000
Contribution Margin $505,000 $200,000 $705,000
Fixed Expenses $150,000 $65,000 $215,000
Operating Income (contribution margin minus fixed expenses) $355,000 $135,000 $490,000

Companies can use a sales mix to diversify their product offerings and increase their profitability. Based on performance results, companies will usually adjust their sales mix to reflect their most profitable option.

Although a company will prepare to sell according to its sales mix, that is only a prediction and does not reflect actual sales. Differences between planned and actual performance results in variances. Sales mix variance is the difference between the planned sales mix and the actual sales mix as reflected in total sales. The equation for sales mix variance is the actual sales mix percentage minus the budgeted sales mix percentage, times the actual number of units sold, times the budgeted contribution margin per unit.
Sales Mix Variance=Actual Sales Mix Percentage×Number of Units Sold×Budgted Contribution Margin per Unit\begin{aligned}\text{Sales Mix Variance}&=\text{Actual Sales Mix Percentage}\times\text{Number of Units Sold}\\&\times\text{Budgted Contribution Margin per Unit}\end{aligned}
Because sales almost never go exactly as planned, calculating the difference between the planned and actual sales mix for a given time period can help a company pinpoint where the sales deviated from the company's calculations. This information allows the company to better plan for the next sales period.

Although the sales mix variance can tell a company how far its predictions were off, it should not be the only tool the company uses for further planning. That is because sales mix variance does not indicate why the sales mix budget was inaccurate. Thus, companies should look to other circumstances that affect profitability. Circumstances that affect profitability can be external or internal. Internal circumstances include a company's costs and expenses. External circumstances include how the public perceives the company and actions taken by its competitors. For example, a competitor launching a new product or decreasing its prices might affect another company's profitability. This shows that there are many circumstances that can affect a company's profitability, and some are difficult to predict and control.