I think that the manager's response that it would be "too much of a hassle to void it alll out and return it" was totally uncalled for and crazy... BUT... I don't think he had any right to ask the lady to leave, either.
If the lady made you guys uncomfortable, you should have done.. exactly what you did. Distanced yourself from her.
I don't see what the manager should have done, or why you're shocked he allowed it to continue?... customers are all different. He doesn't have a right to ask a smelly one to leave and thats pretty offensive to other customers as well. Why would he have a right to control a grown adult's language choices, no matter how non-PC they may be?
She wasn't doing anything illegal and while I might have been shocked I never would have complained to a manager. She wasn't harming her child, or any of the other customers.
I don't really see why you would call and complain? I don't know where there is a valid complaint... unless it had been an employee with the dirty mouth.