If custom domain xyz.com is removed from this tenant how will it change the two user accounts. I know UPN of Bob will need to be changed in order to remove the domain. Would removing the domain also make Bob's primary email to onmicrosoft.com as well as remove all its associated proxyAddress from Sarah's account.
You cannot remove the domain *before* removing any properties where it's being referenced, including UPN and proxyaddresses, so you have to make those changes before you attempt the removal. Including setting a new primary SMTP where needed.