I would go with the 2nd option **(checkboxes)** because:

 - **Radio buttons** usually express **mutually exclusive options** (*EITHER this OR that*), so giving an option that includes but excludes at the same time won't be consistent.
 
 - The **checkboxes** are used **to select several items** (*this AND that*) which is the case. Also take into account that it might happen that you have to add a *new option* and if you use radio buttons, you will have to redesign this control (*remember users hate changes unless they're great improvements*).
 - **"Both" label has more cognitive load since it doesn't express something by itself**, since it's a reference to another items. A way to improve it would be to explicitly named the label "Customer + Item", but the only case I would use it would be in the classic multiple choice exams, where you can find options like "Answer D: All previous answers are correct"