Why did it cost $2.5 million to make?

Well, equipment, actors fees, people you don't see behind the camera fees, property to rent, etc. Costs add up and who knows, they may have used some of the money on kick-backs.

My guess is the money went toward a) animal wrangling and b) visual special effects.

Just the closeup of the millipede was something that hadn't been done very much (if at all) back then.

Having a rat remain with humans, then on cue jump down from the table to the floor and then amble (not run) away, was probably difficult. For a raptor, flying in a window and fluttering about a room is not instinctual behavior. Getting a snake to crawl across the bedcovers, right next to a leg, and up a skirt, was tricky. Even having the pony/unicorn sit when required was probably non-trivial. All these things -and more- likely cost quite a bit of money back then.

Nowadays we're so used to visual special effects we tend to disregard --or not even notice-- all the ones in this film. But I'll bet that when the film first came out the effects were astounding. I'll bet not very many films of its time included a credit specifically for "Special Effects".

Just a few examples (there are many more): Realistic-looking corpses with deep wounds (not just surface flesh wounds) that could be picked up and carried. The wooden branches in the fireplace tend to flame up much brighter whenever Lily sits by the fire. And when Lily takes the old woman from her bed and carries her around, most of the old woman is the size of a child, even though her upper torso is adult sized. (I don't see anything that would make me suspect Therese Giehse was a midget. Anyway, the legs look like a child's legs, not like midget legs.) I don't know how these things were done in 1975, but I suspect it was expensive back then.

(Also the crew may have been more expensive than was typical. Notice the cinematographer was "Sven Nykvist", famous as Ingmar Bergman's cinematographer and arguably the best in the world at that time.)