A value-added tax VAT) is collected on the basis of the value created by the entity. This tax is measured by the difference between the value of the entity's sales and the value of its purchases. A VAT is in effect a retail sales tax. Because a consumer can avoid the tax by not purchasing, a VAT encourages saving and discourages consumption.

The EOQ minimizes the sum of carrying and setup costs. The EOQ is the amount at which carrying costs are equal to setup costs. Thus, plugging the data into the EOQ formula results in the following:

Thus, if each lot consists of 1.000 units, five production runs per year are needed to meet the 5.000-unit demand. At this level, setup costs will total US $5,000 (5 * $1.000) Carrying costs will also equal US $5,000 ($10 per unit carrying cost * average inventory of 500 units). Accordingly, total costs are minimized at US$10,000.