Yes, it makes perfect sense that the compressor would be bad. You mix two INCOMPATIBLE lubricants and you don't get ANY lubrication or you mix two incompatible refrigerants and end up with an acid or whatever eating up the guts of the A/C system. $1200 sounds a little steep though, what exactly are they doing? I'd assume that would include a new compressor, clutch, filter/dryer, flush and conversion to 134a as a minimum along with a warrantee of some amount of time.
Remember though that my cost here in Central America is usually MUCH less than it would be up north in the USA so $1200 might not be too bad!