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
|Percentage of Total Sales||75%||25%||100%|
|Operating Income (contribution margin minus fixed expenses)||$355,000||$135,000||$490,000|
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.