Hello, I hope the following clarifies things for you.
Unfortunately from the description you've provided the Peugeot dealer is correct that the dash needs to be removed. The reason for this is that there are electronically operated plastic flaps inside the heater assembly, these flaps open and close to alter air flow and temperature, the problem is that the plastic breaks allowing the electronic motor to move but this doesn't move the flap due to the break.
The only way to access these flaps is to remove the heater assembly which unfortunately means dash removal. The reason it's expensive is that Peugeot only sell the heater flaps in pairs and the dealer usually wants to sell you a full heater assembly.
I personally would advise to try to find a used heater assembly from a breakers yard (so you get a guarantee) and get a local independent garage to fit it for you, or get the flaps from Peugeot and ask independent garages to fit them, this will reduce the cost significantly. The labour time allowed to remove and refit the heater assembly is about 5 and a half hours.
An example of the flap repair kit is http://www.ebay.co.uk/itm/HEATER-FLAP-REPAIR-KIT-FOR-PEUGEOT-407-CITROEN-C5-DUAL-ZONE-AIR-CONDITIONING-/360644496616?pt=UK_CarsParts_Vehicles_CarParts_SM&hash=item53f8164ce8
I hope this helps but if I can assist further or if you have more questions regarding this let me know and I'll reply as soon as I'm able to.