Online retailer Amazon, Inc. (NASDAQ:AMZN) is expected to release a higher-end 7-inch Kindle Fire in the second quarter of 2012... one that could come with improved touch capabilities.

We expect a higher end 7 Kindle Fire model to be released in 2Q (with some additional features including an improved 10-finger touch controller), Susquehanna Financial analyst Chris Caso wrote in a note to clients.

Caso said Amazon expects to be able to reduce the bill of materials for the existing 7 Kindle Fire from about $150 currently to about $130 by the second quarter, which would allow for a price cut at that time. Texas Instruments, Inc. (NYSE:TXN) supplies the application processor on the 7-inch models of the Kindle Fire.

We also believe AMZN is still in the process of deciding whether to launch an 8.9 or a 10.1 model in 1H12 - we do not think a decision on the screen size has yet been finalized, said Caso, who believes both Texas Instruments and Nvidia are working with Amazon on the design for the larger model.

However, since final decisions have not been made, it is difficult to determine how the design wins will ultimately play out. Nevertheless, Caso has said Amazon is attempting to keep the retail price of the larger Kindle Fire below $350.

The analyst believes current forecasts for the 7-inch Kindle Fire suggests 18 million units in 2012, while supply chain contacts expect a total of approximately 40 million LCD-based Kindle devices in 2012. These include the existing 7-inch Kindle Fire, some new Kindle Fire models yet to be released, as well as some entry level e-readers that will move to LCD screens.

The existing Kindle Fire, which sells at $199, features a vibrant color touch screen, a powerful dual-core processor and a new browser - Amazon Silk - as well as the Amazon Web Services cloud. Amazon also offers a 30-day free trial of Amazon Prime that allows streaming access to Amazon's multimedia library of movies and TV shows. The battery of Kindle Fire offers 8 hours of continuous reading or 7.5 hours of video playback, with wireless off.