1. (20 Marks) The Discount Carpet Company in Kingston West stocks carpet in its warehouse and sells it through an adjoining showroom. The store keeps several brands and styles of carpet in stock; however, its biggest seller is the Super Shag carpet. The store buys the carpet from a manufacturer and is trying to decide the optimal order size and total inventory cost for this brand of carpet. They are also thinking that because it is so popular, they might be able to get away with allowing for back orders.

Discount Carpet estimates the annual demand for the Super Shag is 10,000 metres of carpet, the annual holding cost of $0.75 per meter and it costs $150 every time the manufacturer makes a delivery.

1. [10 marks] Use the EOQ model to determine the optimal order size, total annual inventory costs, the number of orders that will be placed annually and the time between orders. Note: The store is open every day except Sunday, Thanksgiving Day and Christmas (311 days per year).
2. [5 marks] Characterize the decision-making environment for this problem: Is it decision making under certainty, uncertainty or risk?
3. [5 marks] What can you notice about holding costs and ordering costs at the EOQ? Should this be surprising?