Selling lots of Kindles is great for Amazon not because they want to make money selling Kindles, but because they want to make money selling Kindle books. So much so that they take a $5 loss on every cheapo Kindle sold.
According to iSuppli, who tore down the lower-end Kindle to see what was going on inside, it should cost $84.25 to manufacture. Of course, for that price, Amazon is also pumping ads to it when not in use, which has got to make up for that difference. It's also a gadget designed to do pretty much one thing: read books bought from Amazon. So it makes sense that they're selling it as cheaply as possible.
But it also highlights how it'll be difficult for others to break into the ebook game, as only a company as big as Amazon can afford to sell its flagship product at a loss. But hey, their loss is our gain, right?