Amazon is reportedly looking to launch its own smartphone, according to a Citigroup research note. Analyst Mark Mahaney wrote that supply chain checks by a Taipei-based Citigroup colleague suggest Amazon will launch its own phone in the final quarter of 2012. Citigroup believes Amazon is working with Foxconn to develop the device which will then be manufactured by Hoi Han-owned TMS Group, which already makes the Amazon Kindle e-reader and Kindle Fire.

Mahaney said the phone will use the ARM-based Texas Instruments OMAP 4 processor. AllThingsD reports that Amazon will need to pay an “OS royalty” to Microsoft, suggesting it could run the Android OS. The manufacturing cost for the device is predicted to be between US$150 and US$170 and Citigroup believes it could sell for a similar price due to Amazon’s history of driving sales by making losses on hardware.

To this point IHS iSuppli has calculated that Amazon’s Kindle Fire tablet costs US$201.70 to manufacture. The US retail price of the device is US$199, suggesting the company is making a slight loss on each device in a similar way to its Kindle e-reader. “Amazon makes its money not on Kindle hardware, but on the paid content and other products it plans to sell the consumer through the Kindle,” IHS iSuppli senior director Andrew Rassweiler said.

Meanwhile, Taiwan-based tech publication DigiTimes has reported that Amazon is looking to make an 8.9 inch version of the Kindle Fire available by the second quarter of 2012.