Sales mix is the ratios of a business’s products that are sold or plan to be produced for sale. It is an assortment of all the goods and services that a business offers. A company that produces products A, B and C must decide the proportion to which the goods must be produced to make maximum profits.
If the combined target is to sell 100,000 units of product A, B and C, the product mix may be 20,000 units of product A, 50,000 units of product B and 30,000 units of product C. That is a product mix of 20 %, 50% and 30%.
Sales mix is important as the profitability of various commodities changes and as such the profit garnered by a company fluctuates with the change in company’s sales mix. A company has to calculate the most profitable sales mix.
Role of profit margin in determining sales mix
The profit margin of a commodity is its net income taken as a quotient of sales. Profit margin plays a big role in determining the profitability of two different commodities which have different prices. The profit margin of the products when combined should be the highest possible.
Consider a hardware store that stocks bicycles and harmers. The bicycle goes for $500 and brings a profit of $25 while the hammer is sold for $10 and produces a profit of $2. The profit margin of the bicycle is 5% while that of the hammer is 20%. This shows that the hammer, although low in price, brings in more profit per sales dollar. This helps in determining the sales mix.
Sales mix and inventory costs
Inventory costs determine a company’s profits and the product mix determines how much will be incurred in inventory costs. Let’s say the above family decides to have more bicycles and fewer hammers in the product mix.
This means that the company will require bigger warehouse space and a bigger investment in bicycle inventory. Moving the bicycles into the warehouse as well as distributing them to customers represents bigger inventory costs than those associated with hammers.
Sales mix variance
What a company plans to include in its sales mix is not what always ends up being offered to customers. The difference between the planned for sales mix and the actual sales mix that is eventually offered to the consumers is called the sales mix variance.