Quote Originally Posted by mc12345678 View Post
It is intended that out-of-stock (when displayed) be shown at the earliest selection point where such selection would result in any further selection to also be out-of-stock.

That said and seeing the indication of out-of-stock being displayed in the first dropdown, this would be a factor of the entry of data for the variants associated. Could you please identify the variant "arrangement" and quantity for each selection combination as well as the total quantity of stock identified to the main product?

Then may discuss settings, but let's start there first.
I believe this report from SBA will have the info you are thinking of, if not, please let me know what I can clarify:
hi-tec-c-stock-report.zip