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How to Calculate Margin Mix

Original post by John Kibilko of Demand Media

Supermarkets operate on extremely low profit margins, making margin and sales mixes vital.

A company’s margin mix is based on its sales mix. Many businesses sell more than one product or service, and those businesses must determine which products are the most profitable. By doing so, companies can more accurately distribute resources in a way to maximize profits by producing and selling their most profitable products. Different products have different profit margins, and the margin mix reflects the percentage of profits earned based on the sales mix of each product.

Use Sales/Margin Mix Formulas

Step 1

Assume that a business has three products that it sells. Products A, B and C sell for $15, 21 and $36 per unit, respectively. Variable costs are $9, $14 and $19 per unit. (Variable costs are calculated using raw-material and labor costs in combination with annual production output.) The established sales mix percentage is 20, 20 and 60 percent per unit, and the total fixed cost is $40,000. Calculate the break-even dollar and unit sales-mix prices.

Step 2

Calculate margin-per unit costs. Subtract the variable cost per unit from the sales price per unit to determine each unit’s margin. Unit A is $15 - $9 = $6. Unit B is $21 - $14 = $7. Unit C is $36 - $19 = $17.

Step 3

Determine weighted-average contribution margin. The formula is product contribution margin x sales-mix percentage. Product A is $6 -- the contribution margin -- times 20 percent -- the sale-mix percentage -- which equals $1.20. Product B is $7 x 20 percent = $1.40. Product C is $17 x 60 percent = $10.20. The total of the three weighted-average contribution margins is $12.80. Thus the margin mix is 9.375 percent for Product A, 10.9375 percent for Product B and 79.6875 percent for Product B.

Step 4

Calculate break-even sales mix. The total fixed costs -- $40,000 -- divided by the total weighted-average contribution margin per unit -- $12.80 -- equals the break-even point of units needed to be sold. $40,000 ÷ $12.80 = 3,125 total units.

Step 5

Figure product break-even points. Multiply the sales-mix ratio by the total break-even-point units. For Product A, 20 percent x 3,125 units = 625. For Product B, 20 percent x 3,125 units = 625. For Product C, 60 percent x 3,125 = 1,875.

Step 6

Calculate break-even point in dollars. Multiply the break-even product units by the product price to yield product dollar sales. Product A is 625 units x $15 per unit = $9,375 in Product A dollars. Product B is 625 x $21 = $13,125. Product C is 1,875 x $36 = $67,500. The break-even sum of the three products is $90,000.

                   

Tips & Warnings

  • A company’s margin mix depends on the variables of total sales, sales mix, profit margins and weighted-average contribution margins. A company may have one product that dominates its total sales mix but the cost to produce that product affects the profit margin of that product and that product’s contribution to the entire margin mix.
  • A company’s sales mix represents the ratio or proportion of sales derived from different products or services. Sales-mix changes can affect profit levels because different products usually have varying profit margins, and changes in the sales mix impact profits even when total revenue amounts remain unchanged. Selling fewer units of a more profitable product, while attempting to meet sales goals through the sale of less profitable items, can result in lower profits. So identifying and concentrating on the most profitable products is the basis of achieving an optimum sales mix and, ultimately, an ideal margin mix. A company’s sales mix also will guide and direct its sales team.

Resources

References

About the Author

John Kibilko has been writing professionally since 1979. He landed his first professional job with "The Dearborn Press" while still in college. He has since worked as a journalist for several Wayne County newspapers and in corporate communications. He has covered politics, health care, automotive news and police and sports beats. Kibilko earned a Bachelor of Arts in journalism from Wayne State University.


Photo Credits

  • Goodshoot/Goodshoot/Getty Images

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