I think you should just figure out why it doesn't play smoothly. Well the high cpu load clearly is a good indication, so you'd need to figure out what causes this.
The box should certainly be fast enough for dvd playback - even without vdpau mpeg2 decode needs very few cpu cycles (your k8 could probably decode like 10 in parallel... - you could try switching vdpau off to see if that somehow doesn't work right). Scaling shouldn't need any cpu cycles at all (all handled by the graphic chip) unless xbmc does something unusual. Granted your graphic card is terribly slow but I'd think it should be fast enough for this.
You could try something like "sudo perf top" (after installing the perf stuff) which might give some good indication where those cpu cycles are spent. Maybe the distro is just failing to setup dma mode for the dvd drive or something, pio mode could for instance cause such terrible things easily (though that shouldn't happen unless your chipset is blacklisted somewhere). Or xmbc uses some "unreasonable" (for that system) post-processing.
Or maybe you're hitting https://bugs.launchpad.net/unity/+bug/993397
- in which case the solution seems to be to not use unity3d, disabling compositing (compiz) or using other tweaks. I'd think 1.5GB should be enough to run decently, though yes I'd not be completely surprised if you'd require a swap file - as long as only some barely used stuff lands in it there's not really any performance impact.
Actually with working vdpau (but not without) you should be able to play back full hd h.264 videos without problems.
btw for the upgrade options, trinity or llano don't really make a whole lot of sense if you don't plan on using the integrated graphics (and pairing them with a graphic card which is something like 1/8 as fast as the APU itself just seems odd anyway...). You wouldn't actually need to rely on working hw acceleration for video playback however if using these chips since they'd be fast enough for software decoding even of full hd h.264 streams.
Something like a Ivy Bridge Pentium g2120 with HD2500 would even have much faster graphics than the 8400gs provides. AFAIK it should also be possible to use accelerated video decode with those chips though they lack the post-processing features of the more expensive intel cpus (but I don't think you could use them with linux anyway). Even if it wouldn't work though no biggie.