Have you traveled abroad before? Or just not to Europe? Do you have a sense of your travel style?
I would not recommend the first night stop-over. You're likely going to be exhausted after the flight to Iceland - jetlagged that first day...and then you're going to have to get up the next morning and fly out again? I'd try to avoid it and just get on to the continent. Or, spend a few days in Iceland instead of just that first night. Otherwise, personally, I try to get to my destination the very first day (or at least close to it), stay up all day (even if sometimes I can barely stay awake), go to bed at the normal time locally, then get up whenever the next morning - not have to worry about setting an alarm.
Also, spending a week in Berlin seems like a long time for a first visit. I know people who love Berlin and like to spend a lot of time there, but that's because they've been before and know they love it. (I personally didn't care much for Berlin. It's big and spread out and, in my opinion, not particularly picturesque. But I confess, this may be a minority opinion around here.) If you are a World War II buff, you might be disappointed at how little of Nazi Berlin remains (most of it was flattened by bombs at the end of the war). There is some - but there is even more Cold War stuff (not much of the Wall either - most of that is gone).
I might recommend adding Krakow and taking a few days from Berlin for that. Krakow is lovely and was spared from much damage during the war and retains an old-world charm. Plus, there is a lot of World War II history there - Auschwitz nearby obviously is the biggie, but the museum of the Nazi Occupation of Krakow (in the old Oscar Schindler factory - so sometimes referred to as the "Schindler Museum") - is outstanding, one of the best World War II museums I've been to.
If not, I think your original impulse to add some time in Dresden might make sense in favor of a few nights in Berlin. And if you wish to add a small town (because everything on your list is big cities otherwise, and I've come to appreciate a lot of European charm in smaller towns in recent years), consider a night in the town of Görlitz, the eastern most town in Germany, which can be done as a day trip from Dresden...or makes an even better overnight, really. It's small and there isn't much to do there, but it's a neat town, a nice contrast to the big cities and intense museums you'll likely visit otherwise. Görlitz was originally a whole town before the war, but after the war Stalin insisted on "moving" Poland about a thousand miles west, giving territory to Ukraine in the east and taking former German territory for Poland. The new German-Polish border was the river going right down the middle of Görlitz, so the town was split in two during the Cold War. In recent years, the border has been completely removed, and now you can walk across a pedestrian bridge to the Polish side - which is kind of run down compared to the charming German side. A neat experience, anyway.