Regarding 40 CR5 units, that's fine. It might not be the best choice for an army though... just as a warning. In fact, from what I've seen so far, I think that such an army might be decimated unless you use it very well. Diversity is going to be the key... depending on which side you decide to join, you'll see what I mean by example. There are some VERY good army concepts here that I've seen.
As a guideline, think about the skills, spells and abilities you think would be most useful for an army to know. Now determine the level you need to be in order to HAVE that skill, spell, or ability. Next, determine HOW MANY of your army needs to have those abilities... do ALL your grunts need to have cure light wounds? Or just a few that know Cure Mass? Do you REALLY need lvl 5 sorcerers? Or would an army of lvl1 sorcerers do better, since that's all you need for magic missile?
These are the things you should be thinking about. Maximize your army whenever possible.
With the rules I've set up, I've found I don't NEED to enforce large army rules... they evolve natuarally from the optimal army that you'll want.
With regards to the simple ASCII map above... I'm now determining scale. As a specific point to look at, I'd like the Green Desert to take -at least- four days to cross by horse, assuming sufficient water is brought along. Horses vary in distance they can travel in a day, but average at 40 miles. That means the desert must be at least 160 miles deep. To even it up, I think it'll be convenient to make it 200 miles deep, making each square 50 miles.
This means that the Shadowed moor is 450 miles from the Lowly Peaks to the Silgrey Range... not shabby. I think that'll work.