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Dear Sir,
I was thinking about how to calculate the impact of product mix change on average price change. I have two ideas but I dont know which one is “more correct” they give different answers.
Say we compare June – July (impact of product mix change in July on average* July price) company has product A, B, C
*of course by average i mean weighted average
1st approach
We take actual product volumes of A,B,C in July then multiply by their prices in June. Let’s name it theoretical price.
So now we can see what average price (theoretical) in July would be if prices didn’t change from June – only volumes i.e. mix. The diffrence between average price in June and that calculated theoretical average price would represent impact of mix change.
Finally there is Actual July price which is diffrent ofc than this calculated theoretical and diffrence between them would represent not mix impact but actual price rise.
2nd approach
We calculate % price change (delta) of product A,B,C between Actual June and July.
Then we take weights of product A, B, C of total volume in July.We multiply those % changes with related weights to receive an “index” for all products A, B, C.
We sum up those indexes for A, B, C – and the total represents relative price change because of change of product mix.
I would be gratefull If you can find time to share your thoughts.
I am not sure why you are asking this for Paper F5, because they only place that a change of mix is likely to be relevant is in variance analyse where we are calculating the monetary effect rather than an index number.
There is no ‘correct’ way of calculating index numbers for the impact of a mix change.
The most common way in practice is what you have written as your first approach.
Even then there are two ways of arriving at a figure.
The way you have written has compared the two mixes both at June prices (this is a Laspeyre quantity index). You could have compared the two mixes both at July prices (this would be a Paasche quantity index).
They give different answers – there is a logic to both, but there is no such thing as a ‘best’ or ‘correct’ method.(Laspeyre and Paasche are both askable in Paper F2, but they are not asked in F5)
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