Volt-Gear Inc. manufactures power equipment. Volt-Gear has two primary products€”generators and air compressors. The following report was prepared by the controller for Volt- Gear senior marketing management for the year ended Dec. 31, 2014:

The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing. The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as shown below.

The controller determined the following activity-base usage information about each product:

a. Determine the activity cost of each product for sales order processing and post-sale customer service activities.
b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31, 2014. Calculate the gross profit to sales and the income from operations to sales percentages for each product.
c. Interpret the product profitability report. How should management respond to thereport?

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Generators Air Compress Total Revenue Cost of goods sold Gross profit Selling and administrative expenses Income from operations $1,500,000 1,000,000 $2,500,000 1,800,000 700,000 336,900 363,100 1,080,000 5 420,000 720,000 280,000 Activity Activity Rate Activity Base Sales orders Service requests Sales order processing Post-sale customer service 60 per sales order $270 per customer service request Air Compressors 1.430 530 Generators Number of sales orders 1,044 168 Number of service requests