iSuppli: iPhone 3G costs $173 to make

The estimate is based on its Bill of Materials (BOM) according to a preliminary “virtual teardown” conducted by iSuppli Corp.

“At a hardware BOM and manufacturing cost of $173, the new iPhone is significantly less expensive to produce than the first-generation product, despite major improvements in the product’s functionality and unique usability, due to the addition of 3G communications,” said Dr. Jagdish Rebello, director and principal analyst for iSuppli. “The original 8Gbyte iPhone carried a cost of $226 after component price reductions, giving the new product a 23 percent hardware cost reduction due to component price declines.”

Insanely Great Mac estimates that AT&T will subsidize about US$499 for each device making Apple's per-unit profit on an 8GB iPhone US$281 after royalties, or about 56 percent, which is inline with the first generation handset.

If you're a component/chip geek, the Business Week piece is a fantastic read.