I tried adding this to the above post but timed out, so here it is-
Transaxle- Beefed up to handle the higher hp- super diff, hardened keys, welded 3rd and 4th hubs. If you really like ripping around on the street, don't care about highway speeds and aren't afraid of the local police, a 4.125 or 4.375 ring and pinion with close ratio 3rd and 4th gears are a lot of fun. If just driving and getting out on the highway are more your style, stock 1st-4th with 3.88 r&p will give the best results. If the main emphasis is on canyon carving- close gears with the 3.88 would (I think) work well; top speed on the highway will suffer though.
If there's someone local that really knows VW transaxles, great; always best to spend your money in your neighborhood. Other option is Rancho Transmissions. They have a good reputation, know what a VW transaxle needs and have the parts to do pretty well anything you want. When talking to whoever the builder of choice is, be honest; "I don't really drive it that hard" will not last as long as "I really like to wail on it occasionally". Don't be afraid of spending a little extra money so it lasts longer!
I haven't mentioned the ZF limited-slip and Quaife because either will add well over $1,000 to the bill, but either would be fun...
PS-
"what purpose does a motor of this nature serve?" you ask-
A stock stroke engine like that is a cheaper way to get into some fairly serious power. It will be a little peaky (it will feel like stock until it "comes on the cam" somewhere between 3 and 4,000rpm and then take off like gangbusters) and engines that rev that high take a little more to take care of. The same heads, carbs and exhaust in a 2 or 300 cc larger engine can be cammed to peak 1,000 rpm earlier and make the same hp with a way fatter torque curve, but costs more to build. As I said earlier, it would be fun, and if it's a real deal (the guy's just looking to get paid for the parts), just know what you're getting into.
Think of this engine as more of a boy racer thing; I built my similar engine when I was in my early 20's, and knowing what I know now, would build something bigger.