Ice Cream and Shut Down Decisions

About an hour north of New York City along the Hudson River sits a small town called Cold Spring. During the summer, New Yorkers escape the steamy city to Cold Spring and hit up the antique shops or hike Breakneck Ridge. With a population of only 2,000 people and five ice cream shops, they probably have the highest per capita ice cream in history. My favorite shop is called Moo Moo’s. During the summer and fall months, the line to buy ice cream flows down the street. Everyone wants some of their thick, creamy, homemade deliciousness. To me, their cake batter ice cream is the best. My friends rave about the s’mores ice cream.

But, what happens to Moo Moo’s in the winter? Where do all of those New Yorkers go? Yes, some people will still come up to cross-country ski at Fahenstalk Park, eat brunch at Hudson Hil’s, or stock up on fancy soaps at the Cold Spring Apothecary. But, mostly, the streets are quiet. And, shockingly, people are not thinking about ice cream while sporting their furry boots and down-lined coats. What should Moo Moo’s do? Should the stay open?

To think about this problem, we need to examine a business’s profit. In other words, how much do firms make? Well, that depends on how much money they are bringing in and how much is flowing out. In the winter, we can imagine that revenue for poor Moo Moo’s must go way down. Revenue is price x quantity. Price is the same as it was in the summer (unless they think to lower the price) and quantity falls dramatically. So, it is safe to assume that revenue has shrunk. Some ice cream shops put out signs advertising hot chocolate, but Moo Moo’s is strictly ice cream, so it is forced to depend on revenue from ice cream.

What about costs? Well, they have to pay people to scoop ice cream and maybe to even make the ice cream. On top of that, they have to pay for the building (prime real-estate along the waterfront), the freezers in the store, all of the equipment, and electricity/heat. So, if you are in charge of running Moo Moo’s what would you do? That depends! Let’s break this down. For simplicity, we’ll assume that there are just two costs: those of the workers and that for the rent. The cost to hire workers is their variable costs (costs that vary with the amount of ice cream sold) and rent is considered their fixed costs (they have to pay it regardless).

If Moo Moo’s is operating, its profit is:

(1) Profit = Price of Ice Cream x Number of Ice Creams Sold – Cost to hire workers - Cost to rent building

If Moo Moo’s decides to close down for the winter, they won’t make any revenue (even from the die-hard locals like me) but they won’t have to hire the workers. They do still have to pay rent.

Profit would then be:

(2) Profit = 0 – Cost to rent building

Now, you have all the info to answer the question!

If profit in your first equation is positive – operate! You are making profits! Go for it!

If profit in your first equation is negative, however, we have to think a little harder. We’ll compare it to the second equation.

You will still operate if equation 1 is bigger than equation 2. Or simply:

(3) Profit (operating) > Profit (shutting down)

which is the same as:

(4) Revenue – Cost to hire workers - Cost to rent building > 0 - Cost to rent building

Simplifying this, we get that the firm will continue to operate if:

(5) Revenue > Cost to hire workers

In short, MooMoo’s should stay in business if their revenue covers their variable costs (the costs of hiring workers in this case).

They should shut down temporarily if they will make less money than it would cost to hire workers. Or if:

(6) Revenue < Cost to hire workers

What does Moo Moo’s do every winter? Shut down. Then in late March/early April, they open up again. Right when New York is turning beautiful again. Right when their revenue will most likely cover their variable costs. Right when I really need some ice cream.

This example doesn’t just apply to ice cream. Think about your ski lifts, or swimming pools. Do they operate in the off-season? Rarely. They shouldn’t operate if they are going to have to pay more to stay open than shut down, even if over the whole year they are making a positive profit.

This situation doesn’t have to apply to seasonal items either. Take the marshmallow company that opened up in my town. They originally were open 7 days a week. Now they are open 4 – Thursday through Sunday. On those other days, enough people were probably not coming in to cover the cost of opening up.

Whether the marshmallow company stays once its lease is up is another question entirely…. A firm that is making a loss over a year (or in the long-term) should go ahead and leave the market. Maybe this will be a whole other blog post.

Side Notes:

I have not talked to the owners of Moo Moo’s to know if they have actually thought through this, but I would like to think that they do.

Many firms come up with ways to bring in revenue even during off season – your popsicle shop will sell hot chocolate pops in the winter, or your ski slope will continue to run the lift for hikers. While not operating at full capacity, they must be making enough revenue to justify staying open.

While quite different than the s'mores ice cream at MooMoo's, I made my own version for you. I very slightly adapted my favorite chocolate ice cream recipe from the blog Straight from the Farm. Then I layered it with graham crackers, marshmallows, and chopped up brownie pieces. Enjoy!

S'Mores Ice Cream

for the ice cream:

3/4 cup sugar 1 cup milk 1/4 t. salt ¼ cup unsweetened cocoa powder

3 egg yolk (60 grams), lightly beaten

1 tsp. vanilla bean paste 2 ounces bittersweet or semisweet chocolate, chopped 2 cups heavy cream

for the mix ins:

1 cup marshmallows

approx. 4 graham crackers

2 large brownies, chopped up.

Heat sugar, milk, and salt over heat until slightly simmering but not boiling. Add the 1/4 cup cocoa powder and whisk until clumps are gone. In a separate small bowl, have your 3 egg yolks. Slowly add about 1/2 cup of your sugar/milk/chocolate mixture while whisking the eggs (I use a fork). This helps prevent the eggs from scrambling. Once mixed, add the egg/chocolate mixture to the chocolate mixture on the stove and continue heating until it has thickened. You don't want it to boil. The tip is that it should coat the back of your spoon, and if you drag your finger down the spoon it will leave a line.

Remove mixture from heat and pour into a chilled bowl. Add the vanilla bean paste and the chopped chocolate. Stir. Sometimes I like it when clumps of chocolate remain. Chill in fridge for an hour (or overnight) covered.

When ready to make, beat the 2 cups heavy cream in mixer until soft peaks form. Then add the chocolate mixture. Pour all of it into an ice cream maker (mine ends up over flowing, so you might just at 3/4 of the mixture at first).

When ice cream is done, pour a layer in the bottom of your ice cream pan. Add 1/2 of the marshmallows, graham crackers, and chopped brownie. Repeat with ice cream and the toppings. Chill in freezer until ready to eat. Enjoy!