Diamond Brands manufactures cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company oatmeal at a price of $25,000. The following costs are associated with production of oatmeal:

Direct material $12,000

Direct labor 9,000

Manufacturing overhead 13,000

Total $34,000

The manufacturing overhead consists of $9,000 of variable costs with the balance being allocated fixed costs. Should Diamond Brands make or buy the oatmeal?

Continue to make the cereal because the incremental cost of buying is $25,000.

Buy the cereal to save $5,000.

Buy the cereal to save $9,000.

Continue to make the cereal because the incremental cost of buying is $5,000.