I don't think I understand your point about insert tolerances. Define it whatever you define in LT, in the end it all comes down to touching off the bar and measuring the diameter. Furthermore, for discussion purpose, the insert tolerances are much better than what you mentioned. It is in the range of 0.01mm (0.0004") for the critical dimensions.
When is diameter mode, the last G3 move takes the cutter to the extreme X5, while the X end is defined as 10. Sorry for being unable to explain it better. Hope you follow me. Just change between the modes and run the code. You will see where the DROs go. Also load the OD Arc3 wizard and see how the arc movements are affected by changing the mode. I didn't try to understand the math behind it, but for some reason, in diameter mode the 'I' word adds up. In radius mode it's zero.
Had a chance to cut some material today. The wizard doesn't work when in Diameter mode. The cutter plunged deep into the stock. Changed to Radius mode and changed the X values in the wizard accordingly and it worked fine.
I am in diameter. Are you saying that it will always do moves of half a circle? If so then the tool path was misleading - I saw it doing half circles and thought I will get the half circle in the part, but it appears to me now that part of the move will cut air. Will try to cut some material and see how it works.