Transmission output shaft seal and play

[JP Timmerman <jp@barclay.net>]

I have an '89 200q that dumped some gear oil. My best guess was that one of
the final drive flange seals had failed, so I drove it to the dealer. After
a mechanic looked at it, the Customer Service Representative called and
said that the main seal on the back of the transmission needed to be
replaced. The CSR said that they would have to order the seal, and the cost
would be CDN$30 plus an hour's labour to install it. The CSR later called
to say that there would be a delay because they had ordered the wrong seal.
I was going on vacation and said that I would be back in a week to pick it
up. A few days later, the CSR left a message that there was a problem. When
I contacted him, he said that the mechanic couldn't install the seal
because there was far to much play in the transmission output shaft. He
said that it could be moved 'nearly a centimeter and a half'. He said that
the bearing for the shaft must be worn (!) and that the only way to repair
it would be to rebuild the transmission. Somewhere in the conversation he
also said that the seal goes between the housing and the bearing, which
sounds wrong to me, but I didn't question him about it because he isn't the
guy working on it. I have not seen it myself and Bentley isn't with me, but
I think they may be wrong. (I hope that they're wrong!) I suspect that the
mechanic looking at my car may have never done this job before. When I
drove the car to them, it made no funny noises, rattles, clunks, etc... so
I feel that the bearing could not be as worn as they report. Also, a friend
of mine, with a Citroen fetish, changed transmissions in his 2CV and was
surprised to learn that the 5 or 6mm of lateral play in the output shaft
was considered normal. So in order to know whether they're fleecing me, I
need to know:

1. Is that kind of play normal? What are the allowable limits?
2. Does the seal really go between the bearing and the housing? If so, does
the seal locate the bearing?
3. Is it possible/likely that they damaged the bearing while trying to
remove the old seal?
4. Do other components in the system locate the shaft? (Parts that may have
been disconnected for the repair.)
5. What is likely to happen if I ask them to put the seal in without fixing
the bearing?

The car isn't really worth the cost of having THEM rebuild the transmission.
TIA

JP Timmerman
'89 200q 300k+ km