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Problem Statement One division of a company is composed of three people working in a team with total productivity of $400. The accounting system appropriately measures the division profits as $400. Lets call the three team members Diana, Mary, and Florence. Suppose weve chosen these individuals because among all combinations of individuals they produce the most team productivity.

Now replace Diana by the next best alternative person from outside the existing team, and lets say that total output drops to $350. Production with Diana is $400. Production with the next best alternative to Diana is $350. Having Diana is better than the next best alternative by $50. Diana should be able to use this as bargaining power to extract the lions share of this incremental productivity. Diana should be able to bargain that the team should be willing to pay at least the value of $49.99 to Diana and the other two team members are still better off by the net $0.01 remaining of added productivity. By giving Diana the entire $50, at worst the remaining team members should be indifferent to whether Diana or the next best alternative is on the team.

Suppose that something similar is true for Mary and Florence. When Mary is replaced by the next best alternative, productivity drops to $350. When Florence is replaced by the next best alternative, productivity drops to $350. As a result, they each have bargaining power over the team for the worth of about $50.

Heres what I see at this point; out of $400 of productivity, each team member has bargaining power to extract $50 from the team, for a total of $150. This leaves $250 of productivity remaining that is accounted for by the team organization and not inherently able to be appropriated by any individual currently in the team.

Required: 1. The way we have set the problem so far, there is a core level of profitability of $250 that is not attributable to any individual, and cannot be bargained for by any individual. The $250 is attributable to three people working as a team. How should the $250 be distributed among team members? This is a product of your own reflection. There is not a correct answer.

2. Accounting tends to operate by collecting information about what has happened and not about next best alternatives or opportunity cost. Do we ever collect information about next best alternatives? Is it important?

3. My example isnt the only way the numbers could work out. Its possible that replacing each person in turn would cause productivity to drop by $200. This gives the collected team members bargaining power over a total of $600 when total productivity is only $400. What happens then?

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