Pretty decent chance that Apple can't find a 27" panel to "upgrade to" that is also in the price range they want to pay. That is probably a contributing reason more so than lack of projected sales.
The cost price of electronics is
very sensitive to economies of scale, and Apple are effectively the only customer for 5k, 27" panels, so "projected sales" and "cost of panel" are two sides of the same coin.
The potential sales of a 5k iMac would have been eroded in several ways:
First, I'm sure there's a general ongoing trend away from desktops towards laptops, across the whole market... especially in the case of Apple Silicon where the M1 Max MacBook Pro delivers pretty much the same performance as the M1 Max Studio or any hypothetical M1 Max iMac.
Secondly, the 24" M1 iMac now has a bigger and better screen than the old 21.5" and is probably at least comparable in power to the old entry-level i5 5k. That's going to satisfy a lot of potential customers for the entry-level 5k.
Finally, a significant proportion of customers for the
high end i9 iMac and iMac Pro will be delighted to have the option of the "headless" Mac Studio which they can team up with their display of choice (...and possibly only bought an iMac or iMac Pro in the past because there was no viable headless Mac at that level). Even if you go for a Mac Studio + Studio Display you're still paying the same ballpark price as an i9 iMac with 32GB RAM expansion. So the Mac Studio will have decimated the high end of the iMac market.
OTOH, making the separate Studio Display (possible flaws of said product QV
ad nauseam elsewhere) means that Apple can potentially sell it not just to Mac Studio buyers, but to existing Mac Pro owners who want something less expensive than an XDR and to MacBook/MacBook Pro users who want the ultimate MacBook docking station (only a proportion of MacBook owners, to be sure, but there are a
lot more MacBook customers than desktop customers).
So in order to get away from the iMac "thinness police" it was better to "bigger Mini" than fight with folks internally over why the iMac should take principle design cues from the iPad.
Form-over-function thinness
does seem to be an issue at Apple and has certainly influenced the design (and some of the constraints) of both the 24" iMac and the Studio Display. However, a lot of customers welcome the idea of a "Mac Mini Pro/Mac Pro Mini" (i.e. the Mac Studio) and there's a lot to be said for being able to choose (and update) the computer and display separately.
Apple don't seem to like competing with themselves for the same market - so I suspect that the Mac Studio + Studio Display will be their "powerful desktop" offering for a while (with any new Mac Pro being in a whole different price bracket).
There's a "timing" thing, too - the 5k panel is still somewhat ahead of the game today but it's still fairly old tech that has only seen marginal improvements since 2014, and it seems likely that we'll see miniLED or even microLED/improved OLED appearing within the useful lifetime of a 2022 Mac Studio. I don't think now would be the right time to buy a new iMac with an old school 5k panel. Although I personally don't think we'll see a new large-screen iMac/iMac Pro in the near future that
could change if Apple could offer a more substantially upgraded display.
...and then there's the "M1 Pro" thing, too. If the (regular) M2 (as rumored) has 20-50% single core performance
and an extra GPU core - and maybe even support for more RAM - it's likely to thrash the cheaper "binned" M1 Pro on some measures and make the full-fat M1 Pro look a bit mediocre on anything that doesn't really exploit all the cores. (M1 Max has a bit more headroom in terms of GPU and I/O to keep it safe). What's currently
missing from the range is a M1 Pro desktop - whether it's a 24" iMac, 27" iMac or a Mac Mini + Studio Display combo, but now would be a bad time to launch/buy a
brand new M1 Pro machine if the M2 is coming real soon now to replace the 2020 models.
I'm assuming that the M2 Pro/M2 Max - assuming the M2 keeps that convention - won't show until the 2021 MBPs get upgraded, and then those will have a few months of exclusivity before the chips show up in desktops. Until then, the rumoured M2 Mac Mini could represent the best bangs-per-buck on the desktop.