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In cost accounting, the **contribution margin** is a crucial concept. It is the amount each unit sold contributes towards covering the fixed costs and generating profit beyond them. To calculate the contribution margin per unit, you simply subtract the variable cost per unit from the selling price per unit: \[ \text{Contribution Margin per Unit} = \text{Selling Price} - \text{Variable Cost} \] This determination helps in evaluating the profitability of the units sold and the overall profitability of the company. In the provided exercise, the contribution margin gives insight into how much profit is generated before fixed costs are accounted for. It illustrates the impact of variable costs and changes in production or pricing strategies.

**Operating income** is a critical measure of a company's profitability. It reflects the profit a company makes from its regular business operations, excluding any other sources of income. To find the operating income: \[\text{Operating Income} = \text{Total Contribution Margin} - \text{Total Fixed Costs} \] This calculation provides a clear view of how the company's core business is performing independent of non-operational factors. Using the figures from the exercise, Garrett Manufacturing's operating income is shown to change significantly with new production strategies, highlighting the sensitivity of this measure to cost structure revisions.

**Variable costs** are costs that differ directly with the level of production or sales volume. In other words, they fluctuate based on the number of units a company produces or sells. These include costs like raw materials and direct labor. In the exercise, the variable cost per unit was initially \(60\) and projected to decrease to \(54\) with a new investment. This alteration demonstrates a strategy to cut costs through technological investments, allowing a greater contribution margin per unit and enhancing profitability. Tracking variable costs enables businesses to understand cost efficiency better and how these align with pricing strategies.

**Fixed costs** are costs that remain constant, regardless of how many units are produced or sold. These costs include expenses such as rent, salaries, and other overheads that do not vary with production level. In the exercise, Garrett Manufacturing's fixed costs were planned to increase with new technology investments. Although fixed costs rise to \(5,330,000\), they aim to reduce the variable costs per unit. This change reflects a trade-off between higher operational stability (less variation in costs with sales) and the risk of higher upfront expenses. Proper management of fixed costs is key to ensuring that increases in volume directly lead to higher profits without eroding them through increased expenses.