Sales Mix Variance
Sales mix variance measures the impact on a company’s total margin (or contribution margin) when the actual mix of products sold differs from the expected mix. In other words, it evaluates the effect of selling a different proportion of products than was anticipated in the budget, assuming that the total quantity of products sold remains the same.
Sales mix variance is particularly useful for companies offering multiple products or services, especially when these products or services have different profit margins. A shift in the sales mix can significantly affect the company’s profitability, even if the total sales volume remains constant.
Formula:
Sales Mix Variance = (Actual Quantity Sold at Actual Mix − Actual Quantity Sold at Budgeted Mix) × Budgeted Contribution Margin per Unit
Example of Sales Mix Variance
Let’s delve into a fictional scenario to illustrate the concept of sales mix variance.
Scenario: “Trendy Tees” is a company that sells two types of t-shirts: Basic and Premium. They have different profit margins due to differences in material and design costs.
Budgeted Information:
- Sales Mix:
- Basic Tee: 70%
- Premium Tee: 30%
- Contribution Margin per Unit:
- Basic Tee: $5
- Premium Tee: $10
Actual Sales (in units) for June:
- Basic Tee: 1,400 units
- Premium Tee: 800 units
- Total units sold = 2,200
Based on the budgeted sales mix and the actual total sales, the expected sales in units would be:
- Basic Tee: 0.70 × 2,200 = 1,540
- Premium Tee: 0.30 × 2,200 = 660
Calculating Sales Mix Variance:
- Basic Tee:
Variance = (1,400 actual units – 1,540 expected units) x $5 contribution margin per unit
Variance = (-140) x $5 = -$700
- Premium Tee:
Variance = (800 actual units – 660 expected units) x $10 contribution margin per unit
Variance = 140 x $10 = $1,400
Net Sales Mix Variance:
$1,400 (favorable from Premium Tee) – $700 (unfavorable from Basic Tee) = $700 favorable
Interpretation:
The net sales mix variance of $700 favorable indicates that “Trendy Tees” had a better-than-expected sales mix in June. Although they sold fewer Basic Tees than anticipated, the increased sales of the higher-margin Premium Tee more than made up for the shortfall, leading to a net gain in their contribution margin.
This analysis can help “Trendy Tees” in strategic decision-making, perhaps leading them to emphasize their Premium Tee range in future marketing efforts, given its favorable impact on profitability.
