A lot of Volvo's run 5 cylinder engines. $1000 is cheap if it is a Volvo.
The shop likely spent some time hooking up diagnostic equipment to test fuel, ignition, and when those checked out they did a compression check, likely on at least a few cylinders and likely all 5 to see how each cylinder reads. All that might take a hour so the $125 seems OK to me.
The $1,000 is to find out the "why" of you have no or low compression in cylinder 5. Could be a burnt valve, some broken part in the valve train (what makes the valves move), a bent valve, a cracked head, or cracked engine block. Some of these are not too bad to repair and others might not be repairable at all. The $1000 isn't the end of the story.
Did this motor overheat? Did the timing belt break?