There is no way on this green earth that I would quilt for others for so little. I'm astonished they would tell you you shouldn't be charging more than the peanuts they quoted.
If you're concerned about offending- you can either graciously decline altogether and give whatever excuse you want (don't have the time, etc.) OR think and research very carefully about what would be a fair price and give them your list of prices and the terms (they provide batting, iron backing, whether or not binding is included, thread changes, all-over vs. custom, size of quilt, etc).
If they have a fit over your prices I would have on-hand price sheets from several other LAQs in the area and say (graciously) that they are more than welcome to hire any of them to quilt for them. I guarantee that would shut them up in a New York second.