The cost minimizing inventory sets the marginal benefit of increasing the order size equal to its marginal cost.

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This is the basic principle of cost minimizing inventory model. The marginal benefit of increasing the order size is the cost saved per unit by ordering in larger quantities, while the marginal cost is the cost of ordering an additional unit. At the point where marginal benefit equals marginal cost, the total inventory cost is minimized.

The Cost Minimizing Inventory Sets the Marginal Benefit of Increasing