The sticker shock is hard to handle if you have never planned a WDW vacation. That's the problem with putting all the planning in the hands of one person. My extended family has been vaguely talking about a WDW vacation, but wants me to "find good deals on the internet since I'm so good at that" I'm sure I will run into this situation-- although I certainly hope no one will think I am dishonest or ripping them off!

But if you have done a lot of homework, you know the different prices and you know what is a good deal.
$1400 for one half of a BCV 2 bedroom for a week is a perfectly good deal, but if you can't really afford that and were hoping to spend $800 on accomodations, that's not much consolation. Sounds like she just needs some hard-core analysis of pros and cons of locations, resort luxury levels, and so forth and she needs to be upfront about what she wants to pay.
As far as the Magic Kingdom argument, well, it's not exactly a hardship to be at the BCV even if you spend every day at the MK. It's still on-property and quickly acessible by bus.
I'm glad I read this thread because now I am aware of the various land mines involved in being the official trip planner. The first thing I'm going to do is send everyone a copy of the Unofficial Guide; and after that is digested, maybe I'll print out the FAQ here on renting points, along with some sample prices. Once they have digested all that, I'll just put it point blank-- how much do you feel comfortable paying for accomodations-- what's your limit-- what features are worth paying more for (refrigerator or monorail access?) From these boards, I know everyone vacations differently and has different priorities. But a lot of people I know who are planning their first trip to the World go into WDW planning with a lot of preconceived notions-- they definitely want offsite to save money, or want the cheapest resort-- but change their minds and decide to splurge more when reading up on Disney's unique resorts. Others go in knowing they HAVE to be on the monorail, and quickly realize it is out of their price range and have to plan something different. But you have to do the homework, whether it be guidebooks or the internet, to even understand what the differences are. I don't want to be the only person deciding for someone else how they are going to spend their vacation money-- we're talking about thousands of bucks!
It sounds like a very hard situation; I hope you are able to work it out. I'm not sure what the solution is-- since you committed to your neighbors it would be hard to pull out-- but if it weren't for that, I'd say go back to the drawing board, and try to get better information from your sister about what she wants in accomodations-- price, location, and amenity-wise. I think splitting up in two locations-- you in the lap of luxury and she at a budget hotel-- is a pretty bad option that will probably only exacerbate the problem, but I guess if you are committed to your neighbors there isn't much choice. Good luck, let us know how it turns out!