Carol is right the denim will be very heavy so maybe do a smallish one just under single bed size to curl up on the couch with. For a rag quilt it kind of gets quilted as you go. I used fleece as an inner batting for mine, but when I do another I'll leave it out, it is heavy enough without batting of any kind. Flannel makes a great backing, but cotton will work too. I just used X's across the middle of each square to "quilt" it and my husband got me some Fiskars snips to assist with the ragging. Carol is also right about getting a slightly lighter fabric panel to print your photo on. I am not familiar with the phototransfer thing so, maybe it could be applied to your blank panel after all the washings. Not sure even white denim would transfer nicely.
Anyway, that's all I can think of...oh and of course use a denim needle in your machine (sorry if that sounds condescending, but I sometimes forget such things). I don't think it's a dumb idea either....if I had a sister who did something so sweet, I'd be thrilled to bits.