In this study, we formulate the total cost of a feeder line considering different types of fleet (fixed-size and modular) and optimize the service frequency and the number of vehicle modules (units) in case of using modular buses. Using the proposed model, we investigate the differences between the optimal total costs and optimal dispatching policies obtained for fixed-size and modular fleet. The sensitivity of the total costs, the optimal headway, and the number of vehicle units is analyzed with respect to changes in different critical parameters. The results show that at a demand rate of 250 passengers per hour, the modular fleet can operate with up to 94% lower unused seats while still offering an increased quality of service to passengers. We found that the modular fleet always has a lower total cost even if it is up to 10% more expensive than the conventional fixed-size buses in terms of the dispatch cost per seat in a demand range of 15 to 1000 passengers per hour. The results indicate that with an increase in dispatch cost ratio the demand threshold, up to which the modular fleet has less total cost, increases exponentially.