Has anyone on this board perfomed Vol/Price/Mix analysis on gross margin. I googled and read some articles but hasn’t come across something satisfactory. If anyone has any experience on it, please share.
Thanks,
Smuggy
Yes, pretty standard analysis for product companies where you’re trying to build a unit economic model. It’s simple – when you have revenue and costs for units, price, and mix by various product line, you could see the sensitivity impact on gross margins. That’s all the analysis is, though it’s very useful and all too often investors tack on top-line growth rates or margin assumptions without looking at the actual unit economics.
I get that. I’m ok with calulating Price and volume. I’m not getting the mix part.
So, we have 1000s of products and some products we sell in both periods and some we we sell in one of them. Lets call them new products and not sold products. How do you calculate mix in case of new and sold products?
I had to do a lot of this type of analysis while working in corporate strategy. You need to isolate mix to see it’s impact. So, you calculate a mix-adjusted revenue or magin number and compare it to the actuals.
To get a mix-adjusted number, you assume that each product contributed the exact same percentage of the total volume.
For example, you sold 100 units in Period 1. Product A was 50 of those units and Product B was 50. In Period 2, you sold 200 units and Product A was still only 50 units, and Product B was 150. You would create a proforma revenue number that assumes that Product A and Product B were split 50%/50% (i.e. 100 units each) and compare the two totals.
Lets consider this example
Products P0 P1 UGM0 UGM1 Mix0% Adj Vol Mix $ A 50 100 $5.00 $4.00 45% 73 $136.36 B 40 30 $3.00 $4.00 36% 58 -$84.55 C 20 0 $2.00 $0.00 18% 29 -$58.18 D 0 30 $0.00 $2.00 0% 0 $0.00 Total 110 160 $3.73 $3.63 100% 160 -$6.36
Adj Vol = P1 - (Mix0% *P1 total)
Mix $ = (P1 - Adj Vol)* UGM0
In this example, product D was not sold in period 0 and according to this calculation it is not a part of mix. Is that right? How do you deal with product D?
Interesting, I was thinking Volume and Price and Mix analysis in terms of stock prices and volumes and thinking “WTF, why would those things be driving gross margins,” but yes, as an analysis of volume/price/mix of company products and revenue, that makes a lot of sense. Different products have different margins, so if a high margin product is slowly losing unit share and being replaced by products with low margins, you can find that a company has strong-looking revenues but increasingly weak earnings (or vice versa).
Is there a way to fix the table. It is not readble
You can disable rich-text and use HTML, (though that sounds like a lot of work)
Lets consider this example
Products P0 P1 UGM0 UGM1 Mix0% Adj Vol Mix $ A 50 100 $5.00 $4.00 45% 73 $136.36 B 40 30 $3.00 $4.00 36% 58 -$84.55 C 20 0 $2.00 $0.00 18% 29 -$58.18 D 0 30 $0.00 $2.00 0% 0 $0.00 Total 110 160 $3.73 $3.63 100% 160 -$6.36
Adj Vol = P1 - (Mix0% *P1 total)
Mix $ = (P1 - Adj Vol)* UGM0
In this example, product D was not sold in period 0 and according to this calculation it is not a part of mix. Is that right? How do you deal with product D?
Now it looks better.
Maybe I don’t understand the question, but you would just exclude part D in the time period you are calculating. Price / volume / mix is just like a weighted average equation where you are weighting the individual contribution factors to reach a consolidated margin.
Then which bucket would you put it in and why? Price or Volume?
Product D would contribute to volume growth as well as mix, not price though.
You are all on the wrong track. You have to keep in mind that several inviolable principles apply when carrying out volume and mix analysis for Gross Profit/Margin:
. Price and cost variances do NOT explicitly exist.
. Profit rate variance(s) are the fundamental keystone of the analysis and enable mix variance(s) to be recognized implicitly and consistently at ALL levels of the analysis . . . from detail to summary . . . from micro to macro.
The following sites explore this analysis fully. Detailed .pdfs and Excel spreadsheets are provided for download:
http://towsonhigh55.com/links/MixVariance.htm
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http://volume-and-mix-analysis.Weebly.com
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This subject is a bit lengthy for a board/blog such as this. That is why a referral to the above explanatory sites is necessary. Hope this is of help to all and puts this topic to rest.
This topic was resting. For about half a year, in fact.
Well, it certainly seems like the topic _ should _ be resurrected. If no one has been able to solve this fundamentally important analytical question in half a year . . . then let’s raise the topic again! In this day and age, any financial manager (or, for that matter, “analyst”) should possess some mastery of the quantitative factors underlying correct “Volume and Mix Analysis”. It is quite obvious from the above posts that “Volume and Mix Analysis” is still a complete mystery to many analysts. No specific solutions or algorithmic methodologies have been proposed by the posters. I am just attempting to be helpful to the CFA analytical communty. It is indeed time for " . . . the rest of the story".
I do similiar analysis for net interest margins of financial companies.
And I’ve never wanted to reply “OORAH” to a post before on margin analysis lol. Phrank is a bawss
Shouldn’t the posting on a dead thread be called “Thread Necromancy”? (Sorry - I read too much fantasy).