The iPhone 4 takes about $187 to make, and sells for $199 without a contract--leaving barely any room for profit.

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he newest phones on the market, if purchased without a cell phone contact, cost hundreds of dollars—some in the $500+ range. It's insane to think that a small trinket of technology should actually cost that much, especially when carriers offer deep discounts to their customers to get them to buy the phones. So why is the sticker price so high? Are cell companies just trying to rope you into a long contract, one that's costly to get out of early? Are cell phone manufacturers turning a huge profit? The answer might surprise you—it's neither.

parts The various parts of cell phones add up to cost almost as much as the full product is sold for.

Cell phones are actually relatively pricey to produce; the research firm iSuppli looked into what it took to make the iPhone 4 and found that it took about $187 to make—the display is $28.50, the A4 processor costs $10.75, and the gyroscope chip is $2.60, and that's just three of the many parts that comprise the whole phone. Considering that the 16GB iPhone 4 now sells for $199, the manufacturers and Apple weren't making too much off of the cost of the phone alone. So how are these companies suriving if they're only making a couple dollars off of every phone sold?

That's where cell carriers come in. When you sign up for a contract, say with AT&T, some of the money you pay every month goes back to the manufacturer of the phone you purchased through the carrier. For example, if you purchased the iPhone 4 for $199 from AT&T, it's because AT&T and Apple signed an agreement to basically scratch each other's backs—AT&T will pay for the production costs, carry the phone, offer service and earn money from selling the phones and plans, but Apple will take a small cut of those profits because they supplied the phone that got people signing contracts. In other words, carriers pay the bulk of phone production costs, so the companies that offer the phones (the manufacturers, that is, like Apple) still make a decent amount of money on the phones.

It's an icky scheme if you ask us, but we can't really think of any other way that that particular industry would work. We're just surprised to learn that the phones actually cost a pretty penny to make, and that we're not just being sold a phone that took $5 to make for $350.