1) Please be more details. what is it that happens when you test.
2) I don't really follow what you mean by this either.
you have it set to use UPS Shipping rate lookup. you can set UPS to create a separate package for each item if you like, but his will be calculated by weight, not by lime item
if you want to calculate a certain price for each line item, you can set rules of that, but those rules won't be based on the shipping address. you kind of need to choose one sort the other, not both.