# How To Calculate Sales Mix Variance (With Example)

Updated February 3, 2023

Business leaders use a variety of metrics to evaluate the success of a sales strategy. One key component of retail is sales mix, the combination of different services and products that make up a company's revenue. If you're a sales or business development professional, learning how to create and analyze a company's sales mix can help you increase revenue and prove your value to your employer.

In this article, we discuss sales mix, explain how to calculate sales mix variance using a formula and share an example of sales mix variance.

## What is sales mix?

Sales mix refers to the ratio of the various products and services a company offers. It reflects each item sold and the profit margin it generates.

Because each product or service a company provides has its own price point and profit margin, the amounts of each type sold can increase or decrease the company's overall revenue. A company's sales mix ratio might include one or two products or a long list of products and services, depending on the diversity of the company's offerings.

For example, a software company might sell three product lines. The company's sales director might predict that this year, 50% of the revenue may come from Product A, with 30% coming from Product B and 20% from Product C.

This makes the sales mix ratio 50-30-20. Sales mix ratios always add up to 100, and you can convert the ratio to decimals by moving the decimal point two spaces to the left. For example, a 50% sales ratio can also be described as 0.5.

Related: Product Mix: Definition, Importance and Examples

## Why is having the right sales mix important?

Finding the ideal sales mix allows a company's leadership team to maximize profit while minimizing labor and manufacturing costs. A sales mix analysis can help leaders identify which products generate the greatest profit and which might become more profitable with added research and development or marketing efforts. By emphasizing high-profit services and product lines, a company can earn extra revenue, allowing it to grow and develop new products and services.

An effective sales mix also allows the company to sell certain products and services that might be less profitable but offer other benefits. For example, a tutoring company might offer low-cost homework help to qualifying parents because of the founder's desire to share education with everyone.

By combining this service with other, higher-profit services, like test prep or classroom sessions, the company can make enough revenue to continue offering homework help. That way, the company can make a profit while following its mission statement.

Related: What Is the Net Sales Formula? (And How To Calculate It In Excel)

## What is sales mix variance?

Sales mix variance is a key metric that sales leaders use to create an ideal sales mix. It reflects the difference between what the leadership team planned to sell and what the company actually sold, which can help them plan an effective sales mix for the next month, quarter or year.

Typically, sales variance is favorable, which means positive, or unfavorable, which means negative. A favorable sales mix variance means that the product earned more revenue than predicted, while an unfavorable sales mix variance means the company didn't sell as much as expected.

Related: What Is Cost Variance (CV)? Definition, Formula and Examples

## How to calculate sales mix variance

To calculate sales mix, you can use the sales mix variance formula, which gives you an estimated profit or loss that a certain product has caused for a company. Here's the formula:

Sales mix variance = (Actual unit sales x (Actual sales mix percentage – Planned sales mix percentage) x Planned contribution margin per unit

Here's how to use this formula to determine the sales mix variance for a product:

### 1. Collect information about sales

To use this formula, you start by collecting some key information about the company's sales for a certain product, including:

• Actual unit sales: This is the number of units of a certain product sold by a company during a period of time.

• Planned sales mix percentage: This is the percentage of the company's revenue that the leaders predicted might come from a certain product. For example, the manager of a pop-up restaurant might plan to sell 500 sandwiches and 500 burgers in a month, so the planned sales mix for burgers and sandwiches is 0.5, or 50%.

• Actual sales mix percentage: This is the percentage of revenue that actually came from the product. If the pop-up restaurant actually sold 1,200 sandwiches and 800 burgers, the actual sales mix percentage for burgers is 0.4, or 40% of the total, and the actual sales mix percentage for sandwiches is 0.6, or 60%.

• Planned contribution margin per unit: This value reflects the sales price minus related costs for the product. The burger might cost \$6 after you subtract the related costs and the sandwich might cost \$5.

Related: How To Calculate Total Revenue

### 2. Calculate the variance

Next, you can put the information into the sales mix variance formula:

Sales mix variance = (Actual unit sales x (Actual sales mix percentage – Planned sales mix percentage) x Planned contribution margin per unit

Here's how the formula might look for the two products sold at the pop-up restaurant:

• Sandwiches: (1,200 x (0.6– 0.5) x \$5) = \$600 favorable

• Burgers: (800 x (0.4 – 0.5) x \$6) = \$480 unfavorable

A positive result is favorable, while a negative is unfavorable because it represents a loss of potential profit.

Related: How to Calculate Percentage Difference

### 3. Interpret the results

Finally, you can use the results to learn how much the actual mix differed from the planned mix. Sandwiches had a positive variance of \$600, which means that the store earned \$600 more in revenue from sandwiches than expected.

Burgers had a negative variance of \$480, which means the store earned \$480 less than expected from this menu item. The results suggest that an ideal sales mix features more sandwiches than burgers since sandwiches are more popular with customers and cost less to make. The owner might decide to eliminate burgers and add more sandwich options to maximize revenue.

Related: What Is the Sales Revenue Formula? (With Tips To Increase Revenue)

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## Sales mix example

Here's an example of how calculating sales mix variance can help professionals increase a company's revenue:

The director of a start-up record label might decide to release three products in the first year: a low-profit extended play (EP), a mid-profit full-length album and a high-profit greatest hits compilation. The planned contribution margin per unit might be \$2 for the EP, \$5 for the full-length album and \$8 for the compilation.

Based on market research, the sales director of the record label predicts they might sell 100,000 albums total throughout the year, including 30,000 EPs, 50,000 full-length albums and 20,000 compilations, which makes the planned sales mix 30-50-20. At the end of the year, the leadership team gathers to analyze the actual profits from records sold and evaluate the sales mix.

In reality, the company sold 18,000 EPs, 45,000 albums, and 27,000 compilations, making the actual sales mix 20-50-30. To find out how much money the company made or lost from the difference between the planned and actual sales mixes, the sales director completes three variance equations:

• EP: (18,000 x (.20 - .30) x \$2) = \$3,600 unfavorable variance

• Album: (45,000 x (.50 - .50) x \$5) = \$0 variance

• Compilation: (27,000 x (.30 – .20) x \$8) = \$21,600 favorable variance

The sales director can then add the variances together, with the favorable variance being positive and the unfavorable being negative. Overall, the company experienced an \$18,000 positive variance from the planned sales mix. In the next year, the company might release more compilations and fewer EPs, since the compilations were much more profitable.

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