After a teardown by TechInsights and some calculations by Fudzilla, it’s estimated that the 8GB version of the Nexus 7 contains $184 worth of parts alone. That’s the raw materials cost, so it doesn’t include all the other costs that go into producing something like the Nexus 7. It doesn’t factor in the money involved for marketing, logistics, R&D, and so on. If you factor in those costs, it’s easy to see how the $199 Nexus 7 (8GB) is likely costing Google more than $199 per unit.
Is that such a bad thing? Consider this: most home video game consoles are loss leaders in the beginning, because companies like Nintendo and Sony expect to make the money back through software sales. It wouldn’t be that far-fetched to think that Google is effectively taking the same approach here, working to further popularize Android and, thus, make more money from you by way of Google ads, the Google Play store, and other revenue channels. They could make “a handsome profit” from the 16GB model too, since doubling the capacity certainly doesn’t cost Google an extra $50.