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Sales Mix: Definition, Formula & Variance Analysis

Instructor: Tara Schofield
Understanding how each item you sell affects your business can make a big difference in how you make business decisions. This lesson gives you examples of how you can make better decisions as a business owner.

What is a Sales Mix

A sales mix is the collection of all of the products and services a company offers. It considers each individual item a company sells, and the profit margin each product earns. While every product may have a different profit margin, the sales mix considers the profit margin of all of the items combined. By analyzing the sales mix, a company can determine which products should receive the most focus and priority, based on the earning capacity, demand, and the resources needed to produce a product.

Let's imagine you own a food truck. Your menu includes four basic items: hamburgers, hot dogs, grilled cheese, and French fries. Last month you sold $10,000 from your food truck, netting $5,000. Overall you are earning a 50% profit. While you are excited about that profit margin, you think you could improve that if you look at each of your items separately, to determine what the cost of product is of each menu item.

Sales Mix Formula

To analyze the sales mix, you must understand the cost and contribution of each item. For instance, you need to know how much it costs to create a hamburger, and compare that to the sales price of your hamburgers. To evaluate this, let's look at two formulas:

Sales Price - Cost of Materials = Profit

Profit / Sales Price = Profit Margin

Applying Sales Mix Calculations

In our hamburger example, you sell your hamburgers for $6. They each cost $4 to create.

Sales Price - Cost of Materials = Profit

Sales Price = $6

Cost of Materials = $4

$6 - $4 = $2

Profit / Sales Price = Profit Margin

Profit = $2

Sales Price = $6

Profit Margin = 33.3%

By analyzing your hamburgers, you see the profit margin is less than 50%, the profit margin for the sales mix of all items sold. Therefore, you are making less from the hamburgers than from other items.

Let's look at another item, Grilled Cheese Sandwiches.

You sell your grilled cheese for $5. They cost you $1 to create. Using the same formulas as before, we find:

Sales Price - Cost of Materials = Profit

Sales Price = $5

Cost of Materials = $1

$5 - $1 = $4

Profit / Sales Price = Profit Margin

Profit = $4

Sales Price = $5

Profit Margin = 80%

Grilled cheese sandwiches are above the 50% profit margin you are earning on all of your items combined.

Sales Mix Variance Analysis

Each day you sell about 10 hamburgers and 2 grilled cheese. While you earn more per grilled cheese sandwich you sell, the quantity sold is substantially lower than the number of hamburgers you sell. Therefore, altering the profit margin of the hamburgers will make a more sizable impact on your business than improving the profit margin of the grilled cheese by the same percentage.

From the two examples, we find that the hamburgers are earning less profit than your grilled cheese. Each hamburger you sell earns you $2 while each grilled cheese earns you $4. However, there is a greater demand for hamburgers and you sell five times more hamburgers than you do grilled cheese. You may earn more per grilled cheese sold, but you earn more overall from hamburgers due to quantity sold.

To do a complete analysis, you would complete the steps for all of the items you have available on your food truck. Then, you can determine how each item affects your earnings.

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