This paper considers a two-level supply chain consisting of one warehouse and one retailer. Unlike the most similar models which determine the optimal ordering policy according to inventory cost only, in this model, we also consider the transportation cost. We assume that the demand rate at the retailer is known and the demand is confined to a single item. Shortages are allowed neither at the retailer nor at the warehouse. The objective is to find the economic order quantities for both the retailer and the warehouse which minimize the total cost. That is, the sum of the holding and ordering cost at the retailer and warehouse as well as the transportation cost from warehouse to retailer. Numerical results show savings can be made by this model in comparison to the model of optimal ordering policy in which the transportation cost is not considered.

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