This is similar to an options product, and is created in the same way. But once you have configured the options, you can choose to create 'combinations'. The system will then create a unique version record for each permutation of the options. This allows you to record stock level for each permutation separately, have a different SKU / item code for each permutation and set a unique price for each too.

The number of permutations will be limited to a few hundred for performance reasons. Remember that you only need to create a combinations product if you are stock tracking or need a unique SKU or price for each permutation - otherwise use an options product.