In a recent paper, Ouyang et al. [10] proposed a (Q, r, L) inventory model with defective items in an arrival lot. The purpose of this study is to generalize Ouyang et al.’s [10] model by allowing setup cost (A) as a decision variable in conjunction with order quantity (Q), reorder point (r) and lead time (L). In this study, we first assume that the lead time demand follows a normal distribution, and then relax this assumption by only assuming that the first two moments of the lead time demand are given. For each case, an algorithm procedure of finding the optimal solution is developed.