When I select the chest only setting, then either the height or width of the chests becomes maximum 1. I think this is a bug and should not work like that

This is expected behaviour if I understand correctly. When you select "Only chest" you are saying that you want only 1xN and Nx1 blocks of chests to be mergable

Please make the description clearer, thanks

What did you think it meant?

Judging by the name of the settings for selecting the type of chest, it seemed to me that “Chest only” means that only chests can be combined. Or only the warehouse, this includes only warehouses from the mod.

So if you would select "Only Warehouses" what would you expect to be mergable? Because warehouses are types of merged chest, so I don't understand the thought process

After some time I had figured out that the settings means,
but my first thought was the settings change only appearance of the merged chests.

like "Only chests" — the graphics of all merged chests are "chests", the 2x2 chest looks like not the warehouse, but like the 1xN chests, etc.

btw, that would be cool feature.

But unfortunately that would need a lot of code changes