It's fun to dream but I think you guys need a reality check here:
It might be cheaper to do this with old phones ... but would old 2nd hand phones be reliable enough?
Maybe.
1) Hardware engineering and manufacturing is a difficult, expensive business that relies on economies of scale.
2) Bitcoin is very small
Combine (1) and (2) means custom hardware for doing Bitcoin transactions is guaranteed to be very expensive, almost certainly more expensive than just re-using old phones, as phones have already achieved huge economies of scale. It's also far less likely to happen because the effort involved is much greater.
At least two Bitcoin hardware devices are in production ... so people are overcoming this difficulty. Sadly AFAIK none of them has shown the security properties I described.
If you want to buy up old phones and reconfigure (or reflash) to a setup appropriate for Bitcoin usage, then re-ship to customers, that's something one or two people can do at low cost. Now you have your turnkey solution.
That might be a good first milestone.
What's more, you really really want the superior hardware that phones give you. It's not safe to simply sign addresses without anything else. Otherwise your super-secure 3-factor coins or whatever, are secure until the time you want to spend them, and then you can be trivially fooled into sending your coins to somewhere other than where you think you're sending them (the virus on your host computer that motivates all this can rewrite the address). Doing ID verification using any existing proposal means having some kind of network access and processing power.
You could do all that with custom hardware too, but it increases the cost even further.
I'm planning on a small monitor that can only display a Bitcoin address + amount. To my simpleton mind, that should be too much of an added cost ... but as I said, I'm no hardware engineer.
In the end, there's no point. How does malware get onto devices? By exploiting existing apps (ie, web browsers/chat clients/etc), and by convincing you to install it. If you have a dedicated phone that you never install software on and don't use any other apps with, it's as secure as a dedicated device. It's straightforward to make custom builds of Android that are cut down in this way and then reflash old devices with them.
One major downside to the Android approach is that there is too much meat in it. The OS itself is huge, the original capabilities of the device including transmitting mobile signals ... how would you convince an end user that this device is safe?
I do agree that your points about difficulty and complexity are valid ones.