Amazon announced the Kindle Fire a couple of days ago, and the reaction has been overwhelmingly positive. Most analysts predict that the Amazon’s Kindle Fire will soon come to dominate the low end of the tablet market, while the iPad continues to rule the high end.

Amazon has priced the Kindle Fire at just $199, and its strategy is the polar opposite of Apple’s tablet strategy. While Apple has a hefty gross profit margin on its tablet hardware, Amazon will be selling the Kindle Fire at a loss initially, and hopes to make money by selling content to Kindle Fire users.

An initial estimate by Gene Munster stated that Amazon would be losing up to $50 per Kindle Fire initially. However, some research by iSuppli reveals that a single Kindle Fire unit costs Amazon close to $210. This means that Amazon will be losing close to $10 on every Kindle fire it sells.

In Q4 2011, Amazon may take a huge hit to its overall profit margins, because it is expected to sell close to 5 million Kindle Fire units by the end of 2011. Add in shipping and logistical costs, and Amazon could easily be losing $20 per Kindle Fire, which means a $100 million hit to its bottom line.

If it has to pay Microsoft $5-$10 for each Kindle Fire, that may mean an additional hit of around $25-$50 million. Maybe Amazon should buy Palm from HP, if only for its patents.