FMST 210 Lecture 1: The mixed brothers of Bogota
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Two friends (Mary and William) have decided to establishseparate consulting practices and share office space. While theirconsulting practices will be completely independent, they can bothbenefit from sharing the fixed costs of office space. Through anacquaintance, Mary learned of a very special opportunity to obtainoffice space in a prime location. The office suite includes threeprivate offices and normally rents for $4,200 a month. The locationis highly sought after. Mary has an opportunity to lease the spacefor $2,400 a month under a three-year lease. The discounted rent isthe result of Mary being in the right place at the right time. Theproperty is involved in a contentious family dispute, and theowners are willing to take a lower rent from Mary in return for athree-year lease. Mary is not troubled by the three-year termbecause relocation at that time fits her own plans for the future.Quick to take advantage of this extraordinary opportunity, Mary hassigned the lease for this space. Under the terms of the lease, Maryis allowed to sublet the space to others at her discretion. Afterlearning of Williamâs strong interest in sharing the space, Maryasked William for his thoughts on what to do with the third office.After their conversation, Mary decided to mention the opportunityto Griffin, an acquaintance of both Mary and William. Whenapproached, Griffin responded very positively because he also needsoffice space for a venture he intends to launch, and three years isthe ideal time frame for him. When Griffin came to view the vacantoffice space, he came with tape measure in hand. Griffin quicklydetermined that this could be a very good opportunity for him. Nowall they need to do is come to terms regarding a financialagreement and how they will allocate the $2,400 cost of the officerent. Mary and William met separately to discuss their respectivepositions on the allocation question. William (whose favorite song,the Joan Baez classic âKumbaya,â is the ring tone on his cellphone) has suggested that they simply divide the $2,400 by threeand then draw straws to decide who gets which office. Mary (whosefavorite book is Prof. Gearyâs classic tome Reflections onOpportunity Cost) said nothing, but she was stunned by Williamâsposition because Mary believes that Griffin should pay one third of$2,400 and take the small office. After all, he didnât really bringanything to the party, and Griffinâs enthusiasm for the arrangementmakes it clear that he realizes that being associated with Mary andWilliam in the same suite provides him with a brilliant haloeffect. While Mary and William were silently reflecting on theirrespective positions in the negotiation, Griffin (whose favoriteplay is The Adding Machine) was busy reviewing his accountingtextbook. Griffin observed that the three private offices sharecommon space that includes a reception area, a small kitchen, and arestroom. Also, each private office is a different size. After someserious thought, Griffin concluded that a two-stage allocationwould be appropriate (Griffin felt certain this scheme would makehis accounting professor very proud of his work).
The data for the common space and the three offices as measuredby Griffin are as follows:
| Common Areas | Office 1 | Office 2 | Office 3 | Totals | |
| Square footage (1,400 total) | 600 | 400 | 280 | 120 | 1400 |
| Relative percentage - square footage | 42.86% | 28.57% | 20.00% | 8.57% | 100.00% |
| Assume that the cost of common space is shared equally and offices are costed based on square footage | |||||
| Common Areas | Offices | Total | |||
| Divide costs into common costs and office costs | $1,028 | $1,372 | $2,400 | ||
| Costs per office | Office 1 | Office 2 | Office 3 | TOTALS | |
| Share common costs equally | $343 | $343 | $342 | $1,028 | |
| Distribute office costs based on square footage | $686 | $480 | $206 | $1,372 | |
| TOTALS | $1,029 | $823 | $548 | $2,400 | |
Questions to Answer Mary, William, and Griffinhave scheduled a meeting to present their proposals. William plansto propose that they each pay $800 and draw straws for offices.Mary plans to propose that Griffin should pay $1,400, William canpay the balance of $1,000, she will take the large office torecognize her pivotal role in securing the lease, William will takeOffice 2, and Griffin will take Office 3. Griffin has determinedthat while an association with Mary and William will be verybeneficial for his new consulting practice, he really does not needa big office (especially in light of his somewhat weak cashposition). Thus, Griffin will propose that he take Office 3 for$548 and Mary and William take the other two offices with theunderstanding that the costs will be allocated according to thetable that he has prepared ($1,029 and $823). There are threedifferent answers to the question of how the costs of the officespace should be allocated. In a negotiation, the decision made bythe parties becomes by mutual agreement their âright answer.â Afterreviewing the three proposals, it seems unlikely that the partieswill enter into an agreement. Though, this outcome is notimpossible to imagine. Given what you know about the preferences ofthe three parties, under what conditions would you expect the threeparties to reach a negotiated solution to the problem of allocatingthe costs of the office space that will result in a negotiatedagreement between the three parities (Mary, William, and Griffin)to share the space for a three-year period?
