ABC has two divisions, Distribution and Production. The company's primary product is milk. Each division's costs are provided below:

Production: Variable costs per gallon 0.07

Fixed costs per gallon 0.40

Distribution: Variable costs per gallon 0.08

Fixed costs per gallon 0.05

The Distribution Division has been operating at a capacity of 4,500,000 gallons a week and usually purchases 2,250,000 gallons from the Production Division and 2,250,000 gallons from other suppliers at 1.00 per gallon. What is the transfer price per gallon from the Production Division to the Distribution Division, assuming the method used to place a value on each gallon of milk is 170% of variable costs?

Correct Answer: 0.12

Kindly show the solution