A sales mix represents the individual sales of each product sold by a firm compared to total sales. Companies often track this information to determine how much profit they earn or may be able to earn when selling a variety of goods or services. The mix of goods will often affect a company's budget.
For example, a company may sell two different products: widgets and cogs. During the past month, the company sold 300 widgets and 700 cogs. The sales mix is 30 percent widgets and 70 percent cogs.
Most companies attempt to determine the popularity of goods or services sold through the sales mix process. A company's budget will typically start with how many units of a good or service the company expects to sell. The total expected sales multiplied by the selling price is the starting point for cash generated by normal operations. From here, the company will list its expenditures and other costs to produce a certain level of sales. Most companies will experience differing sales figures based on the company's mix of goods and services.
Variance analysis is another use of the company's sales mix. A basic variance calculation is actual product sales minus expected — known as budgeted — sales. Companies will multiply this figure by the individual gross profit for goods and determine how much profit was lost or gained. This analysis helps companies determine specific reasons as to why they lost or gained more money than expected. Completing this variance calculation for each product in the mix helps a company focus its attention on a specific area in the firm.
The addition of product to the current sales mix is another purpose for this calculation. For example, the company who sells widgets and cogs — at 30 and 70 percent, respectively — may decide it also wants to sell plugs. The addition of plugs to the sales mix will probably take sales away from widgets and cogs. The sales reduction in these units will need to be replaced by the sales of plugs. Using the variance analysis, the company can determine if the plugs will sell enough to cover the expected decline in sales in other areas.
External factors can also affect a company's mix of products. Consumer income may drop, resulting in lower sales. Substitute goods offered by a competitor may negatively affect the sales of a company’s good or services. Increased government taxes or regulations can result in higher operating costs and lower profits. Each of these factors and others may result in the need for an external analysis to determine the changes to a successful sales mix.