Sales Rose but Gross Margin Fell? Check Your Sales Mix

If turnover has grown but your monthly report looks less profitable, start with what customers bought. Bring sales by product and the matching cost of goods sold for two comparable periods. You will finish with an explanation of how much the sales mix changed the combined margin.

Compare the same products on the same basis

Use revenue after discounts and returns. Keep GST treatment, reporting dates and cost classifications consistent across both periods. A stock purchase isn't necessarily the cost of the stock sold in that month; check the profit and loss guide if your figures don't reconcile.

Business Queensland's ratio guide defines gross margin as gross profit divided by revenue. For several products, add their gross profit dollars first. Averaging their percentages without weights gives the wrong answer unless their revenues happen to be equal.

Watch what changes when product B sells more

Product A sells for $100 and costs $40 per unit, leaving $60 gross profit. Product B also sells for $100 but costs $80, leaving $20. Neither price nor cost changes.

Assumptions: Fictional Australian-dollar management example. Revenue and costs exclude any recoverable GST; non-recoverable tax is included in costs. No GST entitlement or income-tax deduction is assumed for your business. Contribution is before unallocated overhead and income tax.

Measure	Before	After
A units / revenue	60 / $6,000	50 / $5,000
B units / revenue	40 / $4,000	75 / $7,500
Total revenue	$10,000	$12,500
A share / gross profit	60% / $3,600	40% / $3,000
B share / gross profit	40% / $800	60% / $1,500
Total gross profit	$4,400	$4,500
Overall gross margin	44%	36%

Original ASBG worked example. All businesses, amounts and scenarios are fictional. The table contains the same figures as the visual.

Before: 60% × 60% + 40% × 20% = 44%. After: 40% × 60% + 60% × 20% = 36%. Revenue rises 25%, while gross profit rises only $100. The margin falls eight percentage points. The mix changed; neither product became more expensive to make.

At the old mix, $12,500 revenue would have produced $5,500 gross profit. The actual mix produces $1,000 less. This comparison holds total revenue constant; it is not a full price, unit-volume and cost variance analysis.

Decide whether the tradeoff is acceptable

Lower-margin sales might use otherwise idle capacity or bring worthwhile repeat business. They might also add deliveries, support and stock funding that absorb the extra $100. Test those costs rather than labelling all product B sales bad. If capacity is full, use contribution per bottleneck hour before prioritising orders.

Check three records before changing the offer: product codes on invoices, costs assigned to each code, and credit notes recorded after the reporting cut-off. A recoded bundle can look like a mix shift even though customers bought the same things.

Keep a short monthly mix review

Record revenue share, product margin, gross profit dollars and the commercial reason for each large movement. Compare like-for-like seasons where demand is seasonal. If margins within products changed as well, continue with the gross profit variance worksheet; the mix calculation alone cannot explain the full movement.

Where to get help

Ask your bookkeeper to reconcile product totals with the accounts and your accountant to review unfamiliar cost allocations. The pricing and profit reading guide connects product costs, margin diagnosis and operating decisions.