The Southern Bell Company manufactures 2,000 telephones per year.The full manufacturing costs per telephone are as follows:

Direct materials

$2

Direct labor

8

Variable manufacturing overhead

6

Average fixed manufacturing overhead

6

Total

$22

The Illinois Bell Company has offered to sell Southern Bell Company 2,000 telephones for $15 per unit.If Southern Bell Company accepts the offer, $10,000 of fixed overhead will be eliminated.

Southern Bell should:

1. Make the telephones; the savings is $2,000
2. Buy the telephones; the savings is $24,000
3. Buy the telephones; the savings is $12,000
4. Make the telephones; the savings is $12,000