Easton Electronics Co produces 2,000 TV sets in a year for which it needs an equal number of tubes of a certain type. Each tube costs Rs 10 and the cost to hold a tube in stock for a year is Rs 2.40.

Besides, the cost of placing an order is Rs 150, which is not related to its size.

Now, if an order for 2,000 tubes is placed, only one order per annum is required. When 1,000 units are ordered for, 2 orders in a year are needed, while if 500 units are ordered to be supplied, then a total of 4 orders per annum are required. Naturally, as the number of orders placed increases the ordering cost goes up. More orders, however, would also imply smaller order quantity and, therefore, decreasing holding costs. Thus, we have a trade-off between the ordering and the holding cost. What we attempt in our EOQ model is, then, to find the order size that minimises the cost function T (Q).