14 Apr Sales Mix
What is Sales Mix?
Definition: A company’s sales mix tells you the proportion of the various products that it sells. A company that manufactures two products, say, Product A and Product B, may sell equal numbers of both. There could also be a situation where 80% of its sales may consist of Product A, and the remaining 20%, of Product B. The ratio of the different products that a company sells is known as its sales mix.
What does Sales Mix mean?
The sales mix plays a crucial role in a firm’s profitability and its manufacturing plans.
It is likely that a company will not make the same level of profits on all its products. Some products will yield high margins while others may provide a lower level of return. A company could analyze its sales mix to determine if it can increase production of its most profitable products.
A sales mix analysis can also help in another way. If it is seen that large volumes of low-margin products are being sold while sales of the more profitable items remain low, the company may consider changing its sales incentive plan. It could incentivize its sales team to increase sales of the products that give it a higher margin.
An analysis of the sales mix can also help a company to prepare its sales budget and its manufacturing schedule.
Example of Sales Mix:
Here’s a sales mix example that illustrates how a firm can use this tool in making a business decision. Jorge’s, a restaurant serving Mexican dishes has a seating capacity for 40 customers. It also provides food delivery services. There is one kitchen for both these lines of business.
Sales revenues for 2017 total $1,300,000. A sales mix analysis reveals that 40% of sales are on account of customers who visit the restaurant and the remaining 60% is from the food delivery business.
The proprietor of Jorge’s, Luis Rodriguez, plans to expand operations. He has a choice between expanding seating capacity to 60 and increasing the size of the kitchen to accommodate a greater number of food delivery orders.
A review of the profits reveals that the food delivery business is 30% more profitable than the restaurant. Luis decides to invest in a bigger kitchen and more equipment instead of renting additional space for his restaurant.
A company’s sales mix tells you the proportion of the sales of its various lines of business to its total sales.