Reference no: EM131452270

Two friends (Sammy and Mark) have decided to establish separate consulting practices and share office space. While their consulting practices will be completely independent, they can both benefit from sharing the fixed costs of office space. Through an acquaintance, Sammy learned of a very special opportunity to obtain office space in a prime location. The office suite includes three private offices and normally rents for $4,200 a month. The location is highly sought after. Sammy has an opportunity to lease the space for $2,400 a month under a three-year lease. The discounted rent is the result of Sammy being in the right place at the right time.

The property is involved in a contentious family dispute, and the owners are willing to take a lower rent from Sammy in return for a three-year lease. Sammy is not troubled by the three-year term because relocation at that time fits her own plans for the future. Quick to take advantage of this extraordinary opportunity, Sammy has signed the lease for this space. Under the terms of the lease, Sammyis allowed to sublet the space to others at her discretion. After learning of Mark's strong interest in sharing the space, Sammy asked Mark for his thoughts on what to do with the third office. After their conversation, Sammy decided to mention the opportunity to Griffin, an acquaintance of both Sammy and Mark. When approached, Griffin responded very positively because he also needs office space for a venture he intends to launch, and three years is the ideal time frame for him.

When Griffin came to view the vacant office space, he came with tape measure in hand. Griffin quickly determined that this could be a very good opportunity for him. Now all they need to do is come to terms regarding a financial agreement and how they will allocate the $2,400 cost of the office rent. Sammy and Mark met separately to discuss their respective positions on the allocation question. Mark (whose favorite song, the Joan Baez classic "Kumbaya," is the ring tone on his cell phone) has suggested that they simply divide the $2,400 by three and then draw straws to decide who gets which office. Sammy (whose favorite book is Prof. Geary's classic tome Reflections on Opportunity Cost) said nothing, but she was stunned by Mark's position because Sammy believes that Griffin should pay one third of $2,400 and take the small office.

After all, he didn't really bring anything to the party, and Griffin's enthusiasm for the arrangement makes it clear that he realizes that being associated with Sammy and Mark in the same suite provides him with a brilliant halo effect. While Sammy and Mark were silently reflecting on their respective positions in the negotiation, Griffin (whose favorite play is The Adding Machine) was busy reviewing his accounting textbook. Griffin observed that the three private offices share common space that includes a reception area, a small kitchen, and a restroom. Also, each private office is a different size. After some serious thought, Griffin concluded that a two-stage allocation would be appropriate (Griffin felt certain this scheme would make his accounting professor very proud of his work).

	Common Areas	Office 1	Office 2	Office 3	Total
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

Sammy, Mark, and Griffin have scheduled a meeting to present their proposals. Mark plans to propose that they each pay $800 and draw straws for offices. Sammy plans to propose that Griffin should pay $1,400, Mark can pay the balance of $1,000, she will take the large office to recognize her pivotal role in securing the lease, Mark will take Office 2, and Griffin will take Office 3. Griffin has determined that while an association with Sammy and Mark will be very beneficial for his new consulting practice, he really does not need a big office (especially in light of his somewhat weak cash position). Thus, Griffin will propose that he take Office 3 for $548 and Sammy and Mark take the other two offices with the understanding that the costs will be allocated according to the table that he has prepared ($1,029 and $823).

There are three different answers to the question of how the costs of the office space should be allocated. In a negotiation, the decision made by the parties becomes by mutual agreement their "right answer."

After reviewing the three proposals, it seems unlikely that the parties will enter into an agreement. Though, this outcome is not impossible to imagine. Given what you know about the preferences of the three parties, under what conditions would you expect the three parties to reach a negotiated solution to the problem of allocating the costs of the office space that will result in a negotiated agreement between the three parities (Sammy, Mark, and Griffin) to share the space for a three-year period?