Final answer:
A favorable revenue variance occurs when the average selling price is higher than expected due to a change in sales mix, leading to an increase in total revenue despite the relationship between price and quantity sold.
Step-by-step explanation:
When a change in sales mix causes the average selling price to be higher than the amount expected, the revenue variance is labeled favorable. This is because the sales mix refers to the proportion of each product a company sells, relative to its overall sales. If the mix shifts towards products with a higher selling price, it can result in an increase in average selling price.
A fundamental concept in revenue management is understanding how price (P) and quantity (Q) sold affect total revenue (P x Q). If a given percentage rise in price is not sufficiently large to offset a larger percentage fall in quantity, then total revenue will decrease. The scenario where the opposite is true—a larger percent increase in price more than compensates for a smaller percent decrease in quantity—leads to a favorable variance where total revenue increases.