Ordering costs are the costs incurred to place an order for inventory, such as the cost of processing paperwork, communication, and transportation. Carrying costs are the costs incurred to hold inventory, such as storage, insurance, and obsolescence.
When determining lot sizes, it's important to balance the cost of placing an order with the cost of holding inventory. Ordering smaller lot sizes will increase ordering costs, but decrease carrying costs. Ordering larger lot sizes will decrease ordering costs, but increase carrying costs. Therefore, the optimal lot size is the one that balances these two costs.

Topic 2, Volume B