LG has managed to release a variant of it's well-reviewed Optimus One Android phone with a 3.2 in screen on numerous carriers and price it around $200 off-contract. If LG can do that then surely Apple can. Consider that Apple would be almost guaranteed to sell more of these than LG, they would not require the numerous minor variations in design and software, and they have their own retail outlets already established. If LG can make profit selling theirs at $200 each, imagine Apple's profits at $250 with higher margins and lower overhead.
Not to mention that they would sell a ton more apps and build their own ecosystem.