make or buy

P Limited is considering whether to continue making a component or buy it from an outside supplier. It uses 12,000 of the components each year.

The internal manufacturing cost comprises:

$/unit
Direct materials 3.00
Direct labour 4.00
Variable overhead 1.00
Specific fixed cost 2.50
Other fixed costs 2.00
–––––
12.50
–––––

If the direct labour were not used to manufacture the component, it would be used to increase the production of another item for which there is unlimited demand. This other item has a contribution of $10.00 per unit but requires $8.00 of labour per unit.

The maximum price per component at which buying is preferable to internal manufacture is?

1. Could you explain the logic of the calculation for the lost contribution?

Thanks.