Uhh yah, how about the multimillion dollar R&D Apple conducts, as well as paying the salary of many of its employees involved with making the software and hardware designs? That $175 only includes parts cost as well as manufacturing costs (not even software) - a small fraction of the total engineering costs involved. All that cost has to be recouped somehow, plus have high enough rate of returns.
There definitely is a design flaw in either hardware/software for the home button issue (nobody can say 100% which), but its more of a quality control issue (if its hardware) in a mass manufactured phone.
Yeah, never mind the obscene net profits Apple makes even after paying everyone. Apple's total net cost: $176. The problem here is that we are getting cheap phone parts while still paying $800 for it.