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Now I have tried the "remaster" option, and it seems to me that the new overlay KNOPPIX2 is simply created on top of KNOPPIX and KNOPPIX1. Which may seem like a nuisance if you have purged a lot of...

What is going on, I think, is that a slightly more "advanced" form of remastering is done, where the cloop images are created subject to the 4GB filesize constraint. The overlays are collapsed, but...

I haven't tried that option, but in general, remastering means creating a new compressed image, while overlays are stacked compressed file system modifications relative to the rest of the stack.
So...