But surly if the smoke only effects the roof and next level and the next level is lower than the height of the smoke then surly both locations should be hit and smoke should rise from both locations as per C) .
Both are hit but there simply is no such rule stating the SMOKE rises from the roof.
In case it helps: maybe think of a Gully? You place your SMOKE chit IN the Gully and it rises from that level (as opposed to from the Crest, which is also "hit").
if this was an interior building of two levels then the smoke would hit into level 2 of the build and rise to level 4 satisfying that both the roof and next lower level locations are affected...
Correct. It'd hit the roof and the SMOKE chit placed on Level 2 to rise to (but not into) Level 4.
The implications of this are that you can target interior factory hexes that you cannot see the ground level but can see the roof level and all the effects only apply inside the building as the roof effectively does not exist.
On a one level factory the smoke rises up 2 levels and thus the roof and ground floor is effected.
The roof is always effected (it'll be above a SMOKE chit), though vs same-level lines, at Level 2.5 of a factory, that roof game effect is probably nil.
[And the roof is in fact hit.
Re an HE FFE, there's a Level 2.5 roof IFT attack vs the roof level despite the FFE Blast Height being only two levels tall.
Re a hypothetical 4.5 Level Factory w/only Factory floor and roof level, a WP OBA hit would impose a WP MC vs anyone on the Level 4.5 roof, despite the WP rising only to Level 4.]