How to do Price Volume Mix Analysis in Accounting
What is Price Volume Mix Analysis?
Price Volume Mix Analysis is used to find out how much of the variation in sales revenue is to do with changes in price, sales volume, and the mix of products sold.
This analysis is useful for businesses that offer multiple products or services.
There are three components to consider:
Price
This refers to the selling price of the products or services.
Changes in pricing strategies, discounts, or price increases can significantly affect revenue.
Volume
This represents the quantity of products or services sold.
Changes in sales volume can happen due to seasonality, demand or promotional activities.
Mix
This refers to the proportion of different products or services sold.
For example, a car washing business might offer three types of services:
Service | Proportion/Mix |
Exterior Wash | 55% |
Internal Clean | 10% |
Full Service | 35% |
A change in product mix happens when customers favour one product over another or when new products are launched.
Price Volume Mix Formulas
Here are the formula’s needed to perform a price volume mix analysis:
Price Effect Formula
(New Price − Old Price) × Old Volume
Volume Effect Formula
(New Volume − Old Volume) x Old Price
Mix Effect Formula
(assuming all other changes were due to mix)
Revenue Change − Price Effect – Volume Effect
Example of Price Volume Mix Analysis
Let’s now walk through a step-by-step example of price volume mix analysis calculation:
We will assume that a company sells three products: A, B, and C.
Here are the sales data for the last two years:
Year 1:
Product | Price | Volume |
A | £10 | 1,000 |
B | £15 | 800 |
C | £20 | 500 |
Year 2:
Product | Price | Volume |
A | £11 | 1,000 |
B | £15 | 700 |
C | £23 | 800 |
Step 1: Calculate Total Revenue for Each Period
Year 1:
- Product A: 1,000 × £10 = £10,000
- Product B: 800 × £15 = £12,000
- Product C: 500 × £20 = £10,000
Total Revenue for Year 1: £10,000 + £12,000 + £10,000 = £32,000
Year 2:
- Product A: 1,000 × £11 = £11,000
- Product B: 700 × £15 = £10,500
- Product C: 800 × £23 = £18,400
Total New Revenue for Year 2: £11,000 + £10,500 + £18,400 = £39,900
Step 2: Calculate Revenue Change
The total revenue change from year 1 to year 2 is:
Product | Revenue Year 1 | Revenue Year 2 | Change |
A | £10,000 | £11,000 | £1,000 |
B | £12,000 | £10,500 | (-£1,500) |
C | £10,000 | £18,400 | £8,400 |
£1,000 – £1,500 + £8,400 = £7,900
Now, let’s break this change down into price, volume, and mix effects.
Step 3: Breakdown Price Effect
To find the price effect for each product, we can use the formula:
(PriceYear2 − PriceYear1) × VolumeYear1
Product | Calculation | Result |
A | (£11 − £10) × 1,000 | £1,000 |
B | (£15 − £15) × 800 | £0 |
C | (£23 − £20) × 500 | £1,500 |
Total Price Effect = £1,000 + £0 + £1,500 = £2,500
Therefore, £2,500 of the £7,900 revenue change can be attributed to the changes in price.
Step 4: Breakdown Volume Effect
To find the volume effect for each product, we can use the formula:
(VolumeYear2 − VolumeYear 1) × PriceYear1
Product | Calculation | Result |
A | (1000 − 1000) × £10 | £0 |
B | (700 − 800) × £15 | (-£1,500) |
C | (800 − 500) × £20 | £6,000 |
Total Volume Effect = £0 − £1,500 + £6,000 = £4,500
Therefore, £4,500 of the £7,900 revenue change can be attributed to the changes in volume.
Step 5: Breakdown Mix Effect
Now we can calculate the residual difference – ie if the difference wasn’t to do with price or volume, then it must be from a change in mix:
Mix Effect = Change in Revenue − Price Effect − Volume Effect
Product | Calculation | Result |
A | £1,000 − £1,000 − £0 | £0 |
B | (-£1,500) − £0 − (-£1,500) | £0 |
C | £8,400 − £1500 − £6,000 | £900 |
Therefore, £900 of the £7,900 revenue change can be attributed to the changes in sales mix.
Step 6: Summary of Results
Product | Price Effect | Volume Effect | Mix Effect | Total Effect |
A | £1,000 | £0 | £0 | £1,000 |
B | £0 | (-£1,500) | £0 | (-£1,500) |
C | £1,500 | £6,000 | £900 | £8,400 |
Total | £2,500 | £4,500 | £900 | £7,900 |
The price volume mix variance in total was £7,900.
There was a positive price effect of £2,500 as a result of price increases for Products A and C.
There was also a positive volume effect £4,500 mainly driven by increased sales of Product C, despite a slight decline in Product B’s volume.
There was a positive mix effect of £900 because the sales mix shifted toward Product C, a higher-priced product, which increased its share of total revenue.
Interpreting Price Volume Mix Analysis
Now that we can define and calculate a price volume mix analysis, what do the results tell us?
Price Effect Results
A positive price effect shows the company raised prices without losing sales volume, boosting revenue.
A negative price effect indicates price reductions, often due to discounts or competition. While a price reduction can attract more customers, it can hurt profitability if volume doesn’t rise enough.
Volume Effect Results
A positive volume effect reflects an increase in the number of units sold, showing strong demand or market growth.
A negative volume effect reveals declining sales, possibly from weaker demand or increased competition.
Mix Effect Results
A positive mix effect suggests more customers are buying more higher priced or higher margin products, improving profitability.
A negative mix effect indicates customers are buying more lower priced or lower margin products, which can limit revenue growth.
Advantages of Price Volume Mix Analysis
Price Volume Mix Analysis offers several advantages:
Identifies Revenue Drivers
The price volume mix analysis year over year clearly highlights whether revenue changes are due to price adjustments, volume variations, or product mix changes.
For example, a business discovers that their revenue growth is mainly driven by price increases on products, not by higher sales volume.
Improves Decision Making
Provides valuable insights to refine pricing strategies, product offerings and marketing promotions.
For example, a business notices that their high-margin products are underperforming and adjust their marketing to focus on these products, boosting profitability.
Budgeting and Planning
Helps businesses forecast revenue under different scenarios, improving budgeting and planning accuracy.
For example, a software company uses price volume mix analysis to predict how a price increase on their subscription model will affect revenue, allowing them to set more accurate financial goals and budgets for the next fiscal year.