A teardown of Amazon's Kindle 2 reveals that only half the cost of the device is in materials and manufacturing, which points to a healthy profit margin for the online retailer.

In breaking apart the Kindle 2, iSuppli showed that the profit margin appears hefty enough to allow for future price cuts to battle competitors, such as the Sony Reader, if necessary.

The total cost of materials and manufacturing is $185.49, which represents 51% of the Kindle 2's $359 retail price, iSuppli said. Of that $185.49, $8.66 is for manufacturing expenses and the battery.

By far the most expensive component is the E Ink display, which costs an estimated $60, or 41.5% of the materials cost, iSuppli said.

"The new version of the E Ink display in the Kindle 2 supports 16-level grayscale images, rather than the 4-level version used in the previous-generation hardware," Andrew Rassweiler, director and principal analyst of teardown services for iSuppli, said in a statement released Wednesday. "This makes the Kindle 2's display look like a printed page."

In addition, the display is able to show an image event when it's not drawing power, an important feature for extending battery life.

The second most expensive component is the wireless broadband module, which makes it possible to buy and download electronic books and magazines from Amazon.

Provided by Novatel Wireless, the module costs $39.50, and accounts for 27.3% of the materials cost, iSuppli said. In the first-generation Kindle, the wireless component was within a chipset that was an integral part of the main printed circuit board. In the second generation, the component is separate, making the Kindle easier to design.

In addition, because Novatel makes many different wireless modules, it buys components in high volume, something the company can use to negotiate prices down with suppliers, such as Qualcomm, which makes the integrated circuit core of the wireless module, iSuppli said.

Another key component is Freescale Semiconductor's multimedia application processor, priced at $8.64. The processor is based on an ARM11 microcontroller core, which runs at a clock speed of 532 MHz. Freescale also supplied the audio circuit and power-management integrated circuit.

The Kindle 2's key competitor is the Sony Reader, which sells for $300. Amazon started shipping the second-generation device in February. Amazon has never said how many Kindles it has sold since first releasing the device in November 2007. However, the retailer has said the Kindle represents 10% of the sales of the 230,000 books available in electronic format and in physical form.

The Kindle's success has inspired others to look closely at the e-book reader market. Publisher Hearst reportedly plans to launch a wireless electronic reader this year for viewing its newspapers and magazines.

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