How can they afford to sell these things for $1 with $1 (oops $2) shipping? I know there isn't a lot of fabric in there, but still! The time involved and the fees...
Lisa, yes, you can offer choice of color in a multiple item listing. You can also offer choice in a custom-made item listing. So you could list one and let someone choose the fabric if you were clear it was custom-made.
If you do a multiple item listing with choice of color, you have to be able to satisfy all customers if they all choose the same color. You can't say something like "first bidder gets choice of color".
Fixed price listing insertion fees are based on the net value of everything. So this person paid an insertion fee based on $999 or whatever price it would be all together.
If you were doing a FPL for $0.99 items, you could list 10 for a $0.35 insertion fee or 2 for a $0.35 insertion fee. Your next price point would be for listing 11-25 at $0.99.
Here is ebay's policy on choice listings (note the exceptions): http://pages.ebay.com/help/policies/listing-choice.html