I believe the manager allowed the OP to return the his phone and he then paid the difference and get the 128GB device instead.
I wouldn't let someone who smashed their screen return a phone with a smashed screen and pay the difference to buy a more expensive phone. I mean, it's not like there's a huge profit margin between a 32GB and a 128GB (I'm thinking Apple actually makes more off the 32GB, really).
Odd. Very odd. I could see them agreeing to let him pay more and get a warranty replacement unit, though. Is that what they did, OP?
Because letting someone return a device they crushed without using their warranty (and a cracked screen actually costs money to replace here in the US under AC plus, but I do not know the rules in other countries) for a retail, in the box, new phone seems strange.
Granted, I'm in the US and while Apple has good customer service and I've even had them swap me a warranty phone that had a wee crack in the screen and not charge me to replace, it, I sure would never expect them to take my new phone with the shattered screen as a regular return and give me another new phone in a retail box for nothing but the difference in price.
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Did they give you a replacement phone from a retail box or was it a service unit?
I wonder that myself.