What does cash shop do for this game?

[Canadane]

but then I saw they had to remove a dungeon for it.

They stopped developing 3 dungeons per patch because they wanted to do 2 + another content type. Be this gold saucer, pvp, palace of the dead, diadem, whatever.
So you are actually getting about the same content, just ones going to be different than a dungeon.

I don't think we have access to the SE funding records, so we may never know exactly where the cash shop profits are going.