Divide this number by the number of units sold to arrive at the contribution margin per unit. Calculating how much a product or your entire inventory contributes to your bottom line is necessary to grow revenue. However, when you carry a variety of goods, calculating a breakeven point on sales or working toward a particular profit level becomes more complex because profit from item to item differs. To find out how many of each item you need to sell, you must use your sales mix, variable costs and purchase prices for individual items to determine their contribution margins.

You need the sale price for each item in your inventory as well as fixed costs for your business. For example, your business may produce both large and small candles using the same wax mixture. Variable costs will take into account the costs of raw materials for the mixture itself and the price of candle jars at different sizes, various labels and other unique costs for the individual line.

## Definition of Sales Mix

This concept is one of the key building blocks of break-even analysis. To properly calculate the weighted average contribution margin, start with the most accurate data possible.

However, a company with a higher proportion of fixed costs would more easily be able to take advantage of economies of scale (greater production leading to lower per-unit costs). The break-even value is not a generic value and will vary dependent on the individual business. Some businesses may have a higher or lower break-even point.

Rent and administrative salaries are examples of fixed costs. Whether you produce 1 unit or 10,000, these costs will be about the same each month. For example, raw materials, packaging and shipping, and workers’ wages are all variable costs. Total Fixed Costs$ 96,101Net Operating Income$ 62,581The Beta Company’s contribution margin for the year was 34 percent. This means that, for every dollar of sales, after the costs that were directly related to the sales were subtracted, 34 cents remained to contribute toward paying for the indirect (fixed) costs and later for profit.

Contribution margins are then averaged to determine the weighted average contribution margin, or WACM, a key component of a multi-product breakeven calculations. As an outside investor, you can use this information to predict potential profit risk.If a company primarily experiences variable costs in production, they may have a more stable cost per unit. This will lead to a steadier stream of profit, assuming steady sales.This is true of large retailers like Walmart and Costco.

## What Is the Sales Mix?

### What is sales mix formula?

Sales mix is the relative proportion or ratio of a business’s products that are sold. Sales mix is important because a company’s products usually have different degrees of profitability. Sales mix also applies to service businesses since the services provided will likely have different levels of profitability.

A manager can scale up the number of units produced and estimate the fixed and variable costs for production at each step. This will allow them to see which level of production, if any, are most profitable. You can also use total raw sales figures to calculate the contribution margin. Subtract total variable costs for the product from total sales.

For example, if a business that produces 500,000 units per years spends $50,000 per year in rent, rent costs are allocated to each unit at $0.10 per unit. If production doubles, rent is now allocated at only $0.05 per unit, leaving more room for profit on each sale. This will give you an idea of how much of costs are variable costs. You can then compare this figure to historical variable cost data to track variable cost per units increases or decreases.

- To calculate sales-mix variance, start with the actual number of units your business sold of each product.
- Remember that the sales mix percentage is the product’s percentage of total sales.
- Multiply that number by the actual sales mix percentage for the product minus the budgeted sales-mix percentage.

## How do gross profit margin and operating profit margin differ?

Then, divide that by your production volume for that same time period to get your variable cost per unit produced. You can then multiply your variable cost per unit produced by the total number of additional units you want to produce to get your total variable costs of producing more. To calculate fixed and variable costs, you will need more information than just the total cost and quantity produced. You will need to know either fixed costs or variable costs incurred during production in order to calculate the other. Fixed costs are those that will remain constant even when production volume changes.

Multiply that by the budgeted contribution margin per unit, where the contribution margin is the selling price per unit minus the unit’s variable costs. Calculating the contribution margin is an excellent tool for managers to help determine whether to keep or drop certain aspects of the business. For example, a production line with positive contribution margin should be kept even if it causes negative total profit, when the contribution margin offsets part of the fixed cost. However, it should be dropped if contribution margin is negative because the company would suffer from every unit it produces. The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to the company.

## Examples of Inventory Cost Issues

It is only possible for a firm to pass the break-even point if the dollar value of sales is higher than the variable cost per unit. This means that the selling price of the good must be higher than what the company paid for the good or its components for them to cover the initial price they paid (variable and fixed costs). Once they surpass the break-even price, the company can start making a profit. Contribution margin (CM), or dollar contribution per unit, is the selling price per unit minus the variable cost per unit. “Contribution” represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.

However, it is important that each business develop a break-even point calculation, as this will enable them to see the number of units they need to sell to cover their variable costs. Each sale will also make a contribution to the payment of fixed costs as well. Consider Sally’s sales of small candles from above and add in the sale of 20 large candles at $20 each with variable costs of $9. The contribution margin is sales price of $20 minus variable costs of $9, or $11. Combine this with small candle sales of 50 units and a $4 contribution margin.

A company with high fixed costs and low variable cost also has production leverage, which magnifies profits or loss depending upon revenue. Essentially, sales above a certain point are much more profitable, while sales below that point are much more expensive.

It appears that Beta would do well by emphasizing Line C in its product mix. Moreover, the statement indicates that perhaps prices for line A and line B products are too low. This is information that can’t be gleaned from the regular income statements that an accountant routinely draws up each period. Variable costs, if known, can be combined with fixed costs to carry out a break-even analysis on a new project.

To calculate sales-mix variance, start with the actual number of units your business sold of each product. Multiply that number by the actual sales mix percentage for the product minus the budgeted sales-mix percentage. Remember that the sales mix percentage is the product’s percentage of total sales.

Finally, you need some historic sales figures in order to determine the sales mix. In most cases, increasing production will make each additional unit more profitable. This is because fixed costs are now being spread thinner across a larger production volume.

### Why is sales mix important?

The formula is: (Actual unit sales – Budgeted unit sales) x Budgeted contribution margin. Sales Mix Variance Example. ABC International expects to sell 100 blue widgets, which have a contribution margin of $12 per unit, but actually sells only 80 units.

In the formula, F and v are your fixed and per-unit variable costs, respectively, P is the selling price of the product, and Q is the break-even quantity. For example, a business that sells tables needs to make annual sales of 200 tables to break-even. At present the company is selling fewer than 200 tables and is therefore operating at a loss. As a business, they must consider increasing the number of tables they sell annually in order to make enough money to pay fixed and variable costs. The contribution margin is computed by using a contribution income statement, a management accounting version of the income statement that has been reformatted to group together a business’s fixed and variable costs.

Their fixed costs are relatively low compared to their variable costs, which account for a large proportion of the cost associated with each sale. After you have the raw data, calculating the contribution margin per each product is an easy step. Subtract your variable costs per unit from the sales price per unit to arrive at the margin. While you go forward with the contribution margin only for the WACM calculation, you also can use the information already gathered to determine the contribution margin ratio per product line. Doing so would require adding the investment and other fixed costs together with variable costs and subtracting them from revenue at various production levels.