Actually, there some bigger problems with the function as well...

— It didn’t update the priority cookie properly when one had been set before

* [#1] Exercise: update to [#2]

— After fixing that, I noticed that the included save-excursion doesn’t work
  (https://emacs.stackexchange.com/questions/7574/why-save-excursion-doesnt-save-point-position)

So, here’s a more comprehensive patch, including the previous changes
(in order to support numeric priorities) and then adjusting the
update/insert logic so that it makes more sense.

I did not adjust the indentation, so that you can more clearly see which
lines were changed.  Inline comments in the patch explain what’s going
on.