Sales mix variance definition
/What is the Sales Mix Variance?
The sales mix variance measures the difference in unit volumes in the actual sales mix from the planned sales mix. There is almost always a difference between planned and actual sales, so the sales mix variance is quite useful as a tool for learning about where sales varied from expectations. This is an important analysis, since the sales mix will impact a firm’s profitability, given that some products have higher profit margins than others.
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How to Calculate Sales Mix Variance
The following steps show how to calculate the sales mix variance at the individual product level:
Subtract budgeted unit volume from actual unit volume and multiply by the standard contribution margin. Contribution margin is revenue minus all variable expenses.
Do the same for each of the products sold.
Aggregate this information to arrive at the sales mix variance for the organization.
The sales mix variance formula is as follows:
(Actual unit sales – Budgeted unit sales) × Budgeted contribution margin
= Sales mix variance
Example of the Sales Mix Variance
A company expects to sell 100 platinum harmonicas, which have a contribution margin of $12 per unit, but actually sells only 80 units. Also, the company expects to sell 400 stainless steel harmonicas, which have a contribution margin of $6, but actually sells 500 units. The sales mix variance is:
Platinum harmonica: (80 actual units – 100 budgeted units) × $12 contribution margin = -$240
Stainless steel harmonica: (500 actual units – 400 budgeted units) × $6 contribution margin = $600
Thus, the aggregated sales mix variance is $360, which reflects a large increase in the sales volume of a product having a lower contribution margin, combined with a decline in sales for a product that has a higher contribution margin.
Advantages of the Sales Mix Variance
The main advantage of the sales mix variance is that it gives the sales manager insights into how the sales of products with differing margins are impacting the profitability of a business. The sales manager can then adjust the sales incentives mix to push higher-margin products and services, thereby yielding more profits. A second advantage is that the variance can inform management about which products might need a pricing change in order to adjust the amount of profit they are generating. This is especially important for products that comprise a large proportion of the total product mix being sold.