I got out the instruction sheet for another of Nancy Chong's designs. She includes instructions for hand applique, fusible machine applique, and raw-edge applique.
For the fusible machine applique, the instructions say to "trace the pattern onto the right side of the applique fabric EXCEPT (her caps, not mine) you will trace along the dashed lines, ignoring the solid line. The dashed line will be your cutting line."
When you do hand applique (as I do) you cut on the solid line and turn the top fabric under, toward the dashed line, so it creates an area where the background fabric shows through. When you aren't turning under the edges, as in machine applique or raw-edge applique, you have to cut on the dashed line instead. Be sure not to use a permanent marker, since it may show or rub off.