Nutty - like the sound of your 'bargain' CD, but not sure about the £2.00 each to produce maths. On a small run (say 200) I'd say it cost nearer £5.00 per CD. That's with a nice cheap duplicating arrangement and printing inserts and compiling/sealing the product at home. The big expense is the studio and even an inexpensive local studio will come to a £a few hundreds if you take enough care and time to create a product to be proud of, which is why I feel a £10/£12 tag for a new CD is perfectly reasonable.

A rough guess, based on personal experience and recordings that tend to be at least 50% trad/self penned, so less royalties:
Recording: up to £500 (flat fee whether making 100 or 10,000!)
Duplicating: perhaps £60-80 per 100 (inc on body print)
Covers (ink/paper) perhaps £50-60 per 100
Cases £10 per 100
Royalties £20-30 per 100
+ assorted little bits (cellophane bags, promo copies, adverts etc)

So, if you are reissuing an old recording (say remastered vinyl or cassette, or even doing a re-run of a sold out CD) you don't have to pay the studio fees again, hence £6.00 should cover all. The same maths will apply to Martin & Norma, or to Topic or to any of our superstars. So perhaps the question should be not 'how can they issue one so cheaply?' but 'why aren't all re-releases equally cheap?