On-Site Power, Inc. manufactures power equipment. On-Site Power has two primary products'generators and air compressors. The following report was prepared by the controller for On-Site's senior marketing management:

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 additional 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, 2010. 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 Compressors $840,000 630,000 $210,000 Total Revenue Cost of goods sold Gross profit Selling and administrative expenses Income from operations $1,420,000 1.065,000 $2,260,000 1,695,000 $565,000 S 355,000 193,800 S 371.200 Activity Activity Base Sales orders Service requests Activity Rate Sales order processing Post-sale customer service S 60 per sales order $250 per customer service request Number of sales orders Number of service requests Generators 385 78 Air Compressors 770 420