Case Study 3: Hogwart’s Houses

Case Study 3: Hogwart’s Houses (18 marks)
1. HH is happy with the profitability of its Construction division but is concerned that the other two divisions are struggling. PH is considering discontinuing one or both of these divisions. Advise HH as to whether it should discontinue one of, both, or neither of its divisions (4marks)
2. Now consider for 2020 that there are other competitors in the pre-engineered home business. Prefabrication can sell, Transportation can buy and sell, and Construction can buy from external parties and all divisions are operating at capacity. Market prices for 1 prefabricated housing unit, pre and post shipping, are $60,000 and $90,000, respectively. Further assume that at these prices, the optimal capacity remains at 200 units per division.
Calculate operating income for each division using market prices as the transfer prices – does your answer to part a change at all given these results? (8marks)
3. Still considering that the market prices from part b exist, what would happen if HH allowed the divisions to negotiate their own transfer prices? Qualitatively discuss whether or not there would be changes to the transfer price or quantity exchanged. (6marks)

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