This game is not roll to hit D&D type. This is an action game, where being hit is tied to standing where the enemy swung their weapon.
armor reduces damage taken, but it is ALWAYS better to move out of the way as much as you can. (ok, ok, the rocks thrown by dwarves in max level armor are not worth dodging at 0.2 damage each, but you get the drift).
Max armor reduces damage a ton. Only a couple of enemy do any damage at all in fully upgraded padded... lox, berzerkers, multi-star furbys, multi star wolves all do a fair bit of damage. Most everything else, you may not realize you were being hit.

Near as I can tell, it doesn't matter where they actually hit you, just that they hit you in the first place. So it's not calculating the likelihood of which body part actually got injured and what armor you have there to determine your damage taken. It's calculating a couple of other factors though, like your general armor rating, the resistances granted by your respective armor, any resistances you may have from other sources, and sometimes factors like how much total health you have at the time (you get staggered easier with less health, being hit while staggered tends to hurt more).

Overall it means you want to avoid getting hit in the first place, and when you can't avoid the hit you could use shields to either block additional damage or parry the attack but that when you are hit, it doesn't matter where on your body they manage to hit you so much as how hard they hit you and what damage type they deal when they connect.

Thanks guys, that all helps. Went with trousers then as that was my lowest rated armor before. Sure enough, first upgrade is only 2 leather instead of 5. Nice tip.

No. Armor points are armor points.

Edit: Since it's usually cheaper to upgrade than build a new item, it often can be beneficial to max each item you build before starting the next item.