Sales Mix - Explained
What is the Sales Mix?
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Table of ContentsWhat is a Sales Mix?Why is a Sales Mix Important? Factoring in Profit MarginTarget Net IncomeExamples of Inventory Cost IssuesAcademic Research on Sales Mix
What is a Sales Mix?
The sales mix refers to the proportion of products that a business sells, it is a calculation that seeks to identify the variety of products and the proportion a company sells at a particular time. When this calculation is done, it reflects the proportion of a product sold in relation to the total sales of the business. For instance, if a business sells 100 units of products for a day, 80 units of products might be product A while Product B and C share the remaining 20 units. Typically, different products have different levels of profitability, the onus is now placed on a company's management to reduce or stop selling products with low profitability and increase the sales of highly profitable products.
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Why is a Sales Mix Important?
The sales mix is vital to every business, aside from being an effective tool to measure the profitability of a business, it is a tool that helps to identify the most profitable goods business can sell in order to maximize profit. The sales mix is an important metric for measuring the overall growth and profitability of a business. For instance, if Product A of a company sells more than Product B, the company might decide to put a larger proportion of Product A on sale to increase profitability and growth.
Factoring in Profit Margin
The ability of a company to manage its sales mix determines the level of profitability that the company will record. The profit margin of products put up on sale is essential in a sales mix, it is a ratio used to compare the profitability of different products with different sale prices. The profit margin is realized by dividing the net income by the sales made. When calculating the profit margin of products, the dollar prices of the products are used, this helps to determine which products should increase in proportion in the sales mix and those that should reduce.
Target Net Income
Oftentimes, businesses and firms have targets in terms of the net income thye must attain for a fiscal year. The sales mix is an important tool that helps business draft plans that will help them achieve their goals. For instance, if Business A wants to generate a net income of $500,000, an adequate sales mix is required so that a larger proportion of profitable goods will be displayed for sale and decrease the display of less-profitable goods. Hence, businesses that want to achieve their net income goals focus their sales mix on goods that realize higher profit margins.
Examples of Inventory Cost Issues
There is a crucial impact that sales mix has on a company's inventory cost, the impact, whether positive or negative reflects on the inventory cost that a business will incur. The total inventory costs incurred by a business also reflect on the profit margin of the company. For example; if Business A stock goods that require large space and do not sell fast in the place of small products that move faster, the cost of storing the goods will create higher costs for the business and in turn, lower profit margin.
Academic Research on Sales Mix