Dave,
I just checked the specs on the CD Player's output level and the amplifier's input sensitivity. Basically, the amplifier only needs to see 250 mV at the inputs to drive the power section to the full 115W rated output. Your CD player puts out 2.14VRMS at 1kHz at the digital 0dB level (this is a typical figure for a CD player). So it would appear that the CD player is capable of putting out way more voltage than your amp needs in order to produce its full rated power. This suggests that the amp would reach clipping (point where distortion skyrockets) at a fraction of the volume knob's maximum rotation.
So I believe the distributor is correct in saying that your units are working as intended. Your situation is actually common. Manufacturers want to know that you could drive your amp to full power even in the worse case scenario of having a much lower output source component. The numbers on the volume control are merely arbitrary indicators that will not tell you where maximum volume will occur with a given source component and a particular recording.
If you took your amp to a tech for a bench test, I'm fairly sure he'd find that your amp is meeting it's full output power spec. It just reaches full power at a lower position on the volume knob than might be typical, since the amp's input sensitivity is on the high side... By the time you recognize distortion (gross distortion as you observed) the amp is well past its maximum safe output level.
Since many components have different output voltages, the point on the dial where the amp clips will vary from source to source and from recording to recording. For instance, in my system, I have to turn my volume knob considerably higher when using my turntable than I do when using the CD player to get the same volume level... Plus, not all recordings are made at the same output level (they can vary quite a bit). I know I can clip my power amp well below its maximum volume setting with any combination of source and recording. This is normal.
Enjoy your new system -- but watch that volume level! If you hear obvious distortion, it's way too loud. Be aware: excessive distortion can make the amp unstable and can harm both the amplifier and the loudspeaker(s). Many manufacturer's warranties will not cover damage caused by overdriven amplifiers... They consider it abuse and misuse.
