They may be losing a lot of money right off the bat, but R&D and advertising costs per unit decrease with more production. They have already succeeded where so many other companies have failed, to market and release a tablet that can sell unit for unit with the iPad in volume. Sure, it isn't as powerful a unit as the iPad, but if it has the right apps, and a good browsing, movie and music experience, that is all most consumers care about. If they can get that experience at $300 less then the baseline iPad, all the better.
Not to mention, with this swift stroke with the Kindle pricing they have all but eliminated B&N from being able to compete at this point, which I think is more important to them in the long run. If they can get B&N to go belly up so the Nook is no longer an option, any costs they incur now is definitely worth it as they would pretty much have monopolized the industry.