OK, the background image is 170.667 px/in whereas the "dog" image is 1855 px/in. So, do I reduce the 'dog' image to 170.667 px/in?
Re Step 5, I know how to reduce/increase the size of an image in a layer like you pointed out.
You can do that if you wish.
Be sure that "resample image" & "constrain proportions" are ticked. Also, in the drop-down at the bottom, use
"Bicubic Sharper".
Then proceed to make the selection of the dog.
Minor size adjustment can be made via the handles of the bounding box.
As for resolution, it is recommended to have 240-300px/in for printing, although I have printed successfully at resolution less than this value. For web work, 72px/in is ok.