CA IPC ASSIGNMENT MATERIAL, MARGINAL COSTING & BUDGETARY CONTROL

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1 CA IPC ASSIGNMENT MATERIAL, MARGINAL COSTING & BUDGETARY CONTROL MM: 87 Marks Question 1: Arnav Udyog, a small scale manufacturer, produces a product X by using two raw materials A and B in the ratio of 3:2. Material A is perishable in nature and if not used within 5 days of purchase it becomes obsolete. Material B is durable in nature and can be used even after one year. The company has estimated a sales volume of 30,000 kg. for the month of July 2016 and expects that the trend will continue for the entire year. The ratio of input and output is 5:3. The purchase price of per kilogram of raw material A and B is `15 and `22 respectively exclusive of taxes. Material A can be purchased from the local market within 1 to 2 days period. On the other hand Material B is purchased from neighboring state and it takes 2 to 4 days to receive the material in the store. To place an order the company has to incur an administrative cost of `120. Carrying cost for Material A and B is 15% and 5% respectively. At present Material A is purchased in a lot of 8,000 kg. to avail 10% discount on market price. VAT applicable for material A is 4% (credit available) and CST on Material B is 2% (credit not available). Company works for 25 days in a month and production is carried out evenly. You are required to calculate: (i) Economic Order Quantity (EOQ) for each material; (ii) Maximum stock level for Material A. (iii) Calculate saving/ loss in Material A if purchase quantity equals to EOQ. (15 marks) Solution: Workings: Monthly Production of X = 30,000 kgs. Raw Material Required = 30,000 x 5 = 50,000 kgs. 3 Material A = 50,000 x 3 = 30,000 kg. 5 Material B = 50,000 x 2 = 20,000 kg. 5 (i) Calculation of Economic Order Quantity (EOQ): Material A = 2 x Annual consumption x Order cost Carrying cost per unit p.a. = 2 x (30,000 kg. x 12 months) x `120 (15% of `15) = 8,64,00,000 = 6, kg. or 6,197 kg Material B = 2 x (20,000 kg. x 12 months) x `120 (5%of 22.44*) = 5,76,00,000 = 7, or 7,165 kg *Purchase price + 2% CST = `22 + 2% of `22 = `22.44 (ii) Calculation of Maximum Stock level: Since, the Material A is perishable in nature and it required to be used within 5 days, hence, the Maximum Stock Level shall be lower of two: (a) Stock equal to 5 days consumption = 30,000kg. x 5days = 6,000 kg. 25days (a) Maximum Stock Level for Material A: Re-order Quantity + Re-order level (Min consumption* Min. lead time) Where, Re-order Quantity = 8,000 kg. Re-order level = Max. Consumption* Max. Lead time = 30,000/25 2 days = 2,400 kg. Maximum stock Level = 8,000 kg. + 2,400 kg. - (30,000/25 1 day) = 10,400 1,200 = 9,200 kg.

2 Stock required for 5 days consumption is lower than the maximum stock level calculated through the formula. Therefore, Maximum Stock Level will be 6,000 kg. (*Since, production is processed evenly throughout the month hence material consumption will also be even.) (iii) Calculation of Savings/ loss in Material A if purchase quantity equals to EOQ. Purchase Quantity = 8,000 kg. Annual consumption 3,60,000 kg. (30, months) No. of orders [Note- (1)] 60 (3,60,000 6,000) Ordering Cost (a) `7,200 (`120 60) Carrying Cost (b) [Note- (2)] `8,100 (15% of ` ,000) Purchase Cost (c) (for good `48,60,000 portion) (` ,60,000) Loss due to obsolescence (d) [Note- (3)] `16,20,000 [`13.5 (60 2,000)] Purchase Quantity = EOQ i.e. 6,197 kg. 3,60,000 kg. (30, months) 60 (3,60,000 6,000) `7,200 (`120 60) `6,972 (15% of `15 3,098.5) `54,00,000 (`15 3,60,000) `1,77,300 [`15 (60 197)] Total Cost [(a) + (b) + (c) + (d)] `64,95,300 `55,91,472 If purchase quantity equals to EOQ, there will be a saving of `9,03,828 i.e. `64,95,300 - `55,91,472. Notes: (1) As after 5 days of purchase the Material A gets obsolete, the quantity in excess of 5 days consumption i.e. 6,000 kg. are wasted. Hence, after 6,000 kg., a fresh order needs to be given. (2) Carrying cost is incurred on average stock of Materials purchased. (3) The excess quantity of material gets obsolete and loss has to be incurred. Question No. 2 Aditya Ltd. manufactures two products K and H. The sales director has anticipated to sale 8,000 units of Product K and 4,200 units of Product H. The Standard cost data for the products for next year are as follows: Product- K Per unit Product- H Per unit Direct materials: -Material `15 per kg. 12 kg. 15 kg. -Material Y@ `16 per kg. 15 kg. 6 kg. -Material `5 per ltr. 8 ltr. 14 ltr. Direct wages: `40 per hour 12 hour 10 hour `75 per hour 8 hour 5 hour Budgeted stocks for next year are as follows: Product- K (Units) Product- H (Units) 1st April, ,600 31st March, ,000 2,100 Material-X (kg) Material-Y (kg) Material-Z (ltr) 1st April, ,000 30,000 14,000 31st March, ,000 18,000 7,500 Prepare the following budgets for next year: (a) Production budget, in units; (b) Material purchase budget, in quantity and in value; (c) Direct labour budget, in hours and in value. Solution: (a) Production Budget (in units) Product- K (units) Product- H (units) Expected sales 8,000 4,200 Add: Closing stock 1,000 2,100 Less: Opening stock (800) (1,600) Units to be produced 8,200 4,700 (b) Material Purchase Budget Material-X (kg.) Material-Y (kg.) Material-Z (ltr.) Materials required: (9 marks)

3 - Product-K 98,400 (8,200 units 12 kg.) - Product- H 70,500 (4,700 units 15 kg.) 1,23,000 (8,200 units 15 kg.) 28,200 (4,700 units 6 kg.) 65,600 (8,200 units 8 ltr.) 65,800 (4,700 units 14 ltr.) Total 1,68,900 1,51,200 1,31,400 Add: Closing stock 30,000 18,000 7,500 Less: Opening stock (25,000) (30,000) (14,000) Quantity to be purchased 1,73,900 1,39,200 1,24,900 Rate `15 per kg. `16 per kg. `5 per ltr. Purchase cost `26,08,500 `22,27,200 `6,24,500 (c) Direct Labour Budget Unskilled (hours) For Product K 98,400 (8,200 units 12 hours) For Product H 47,000 (4,700 units 10 hours) Skilled (hours) 65,600 (8,200 units 8 hours) 23,500 (4,700 units 5 hours) Labour hours required 1,45,400 89,100 Rate `40 per hour `75 per hour Wages to be paid `58,16,000 `66,82,500 Question No. 3: A dairy product company manufacturing baby food with a shelf life of one year furnishes the following information: (i) On 1 st January, 2016, the company has an opening stock of 20,000 packets whose variable cost is `180 per packet. (ii) In 2015, production was 1,20,000 packets and the expected production in 2016 is 1,50,000 packets. Expected sales for 2016 is 1,60,000 packets. (iii) In 2015, fixed cost per unit was ` 60 and it is expected to increase by 10% in The variable cost is expected to increase by 25%. Selling price for 2016 has been fixed at `300 per packet. You are required to calculate the Break-even volume in units for (5 marks) Solution: Working Notes: Particulars Fixed Cost 72,00,000 (`60 1,20,000 units) 79,20,000 (110% of `72,00,000) Variable Cost (125% of `180) Calculation of Break-even Point (in units): Since, shelf life of the product is one year only, hence, opening stock is to be sold first. Total Contribution required to recover total fixed cost in 2016 and to reach break-even volume. 79,20,000 Less: Contribution from opening stock {20,000 units (`300 `180)} 24,00,000 Balance Contribution to be recovered 55,20,000 Units to be produced to get balance contribution = `55,20,000 = 73,600 packets Break-even volume in units for 2016 Packets From 2016 production 73,600 Add: Opening stock from ,000 93,600 Question No. 4: Aditya Brothers supplies surgical gloves to nursing homes and polyclinics in the city. These surgical gloves are sold in pack of 10 pairs at price of `250 per pack. For the month of November 2015, it has been anticipated that a demand for 60,000 packs of surgical gloves will arise. Aditya Brothers purchases these gloves from the manufacturer at `228 per pack within a 4 to 6 days lead time. The ordering and related cost is `240 per order. The storage cost is 10% p.a. of average inventory investment.

4 Required: (i) Calculated the Economic Order Quantity (EOQ) (ii) Calculate the number of orders needed every year (iii) Calculate the total cost of ordering and storage of the surgical gloves. (iv) Determine when the next should order to be placed. (Assuming that the company does maintain a safety stock and that the present inventory level is 10,033 packs with a year of 360 working days). (8 marks) Solution: (i) Calculation of Economic Order Quantity: EOQ = 2 x A x O = 2 x (60,000 packs x 12 months) x `240 = 3,893.3 packs or 3,893 packs C `228 x 10% (ii) Number of orders per year Annual requirements = 7,20,000 packs = or 185 orders a year EOQ 3,893 packs (iii) Ordering and storage costs Particulars Amount in Ordering costs : 185 orders x `240 44, Storage cost : ½ (3,893 packs x 10% of `228) 44, Total cost of ordering & storage cost 88, (iv) Timing of next order (a) Day s requirement served by each order. Number of days requirements = No. of working days = 360 days = 1.94 days Supply. No. of order in a year 185 orders This implies that each order of 3,893 packs supplies for requirements of 1.94 days only. (b) Days requirement covered by inventory = Units in inventory x (Day s requirement served by an order) Economic order quantity = 10,033 packs x 1.94 days - 5 days requirement 3,893 packs (c) Time interval for placing next order = Inventory left for day s requirement Average lead time of delivery = 5 days 5 days = 0 days This means that next order for the replenishment of supplies has to be placed immediately. Question No. 5: T Ltd produces a single product T-10 and sells it at a fixed price of `2,050 per unit. The production and sales data for first quarter of the year are as follows: Particulars April May June Sales in units 4,200 4,500 5,200 Production in units 4,600 4,400 5,500 Actual/budget information for each month was as follows: Direct materials 4 kilograms at `120 per kilogram Direct labour 6 hours at `60 per hour Variable production overheads 150% of direct labour Sales commission 15% of sales value Fixed production overheads `5,00,000 Fixed selling overheads `95,000 There was no opening inventory at the start of the quarter. Fixed production overheads are budgeted at `60,00,000 per annum and are absorbed into products based on a budgeted normal output of 60,000 units per annum. Required: (a) Prepare a profit statement for each of the three months using absorption costing principles. (b) Prepare a profit statement for each of the three months using marginal costing principles. (c) Present a reconciliation of the profit or loss figures given in your answer to (a) and (b). (9 marks) Solution: (a) Statement of Profit under Absorption Costing Particulars April May June Sales (units) 4,200 4,500 5,200 Selling price per unit 2,050 2,050 2,050 Sales value (A) 86,10,000 92,25,000 1,06,60,000 Cost of Goods Sold: Opening `1, ,92,000 4,44,000 Production `1,480 68,08,000 65,12,000 81,40,000

5 Closing `1,480 (5,92,000) (4,44,000) (8,88,000) Under/(Over) absorption 40,000 60,000 (50,000) Add: Fixed Selling Overheads 95,000 95,000 95,000 Cost of Sales (B) 63,51,000 68,15,000 77,41,000 Profit (A B) 22,59,000 24,10,000 29,19,000 Workings: 1. Calculation of full production cost Particulars Amount in Direct Materials (4 kg. x `120) 480 Direct labour (6 hours x `60) 360 Variable production Overhead (150% of `360) 540 Total Variable cost 1,380 Fixed production overhead `60,00, ,000 units 2. Calculation of Opening and Closing stock Particulars April May June Opening Stock Add: Production 4,600 4,400 5,500 Less: Sales (4,200) (4,500) (5,200) 100 1,480 Closing Stock Calculation of Under/Over absorption of fixed production overhead Particulars April May June Actual Overhead 5,00,000 5,00,000 5,00,000 Overhead absorbed 4,60,000 (4,600 units x `100) 4,40,000 (4,400 units x `100) 5,50,000 (5,500 units x `100) Under/(Over) absorption 40,000 60,000 (50,000) (b) Statement of Profit under Marginal Costing Particulars Sales (units) 4,200 4,500 5,200 Selling price per unit 2,050 2,050 2,050 Sales value 86,10,000 92,25,000 1,06,60,000 Less: Variable production cost (57,96,000) (62,10,000) (71,76,000) Contribution 28,14,000 30,15,000 34,84,000 Less: Fixed Production Overheads (5,00,000) (5,00,000) (5,00,000) Less: Fixed Selling Overheads (95,000) (95,000) (95,000) Profit 22,19,000 24,20,000 28,89,000 (c) Reconciliation of profit under Absorption costing to Marginal Costing Particulars April April May May June Profit under Absorption Costing 22,59,000 24,10,000 29,19,000 Add: Opening Stock 0 40,000 (400 x `100) 30,000 (300 x `100) Less: Closing Stock 40,000 (400 x `100) 30,000 (300 x `100) 60,000 (600 x `100) Profit under Marginal Costing 22,19,000 24,20,000 28,89,000 Question No. 6: G Ltd. manufactures two products called M and N. Both products use a common raw material Z. The raw material Z is `36 per kg from the market. The company has decided to review inventory management policies for the forthcoming year. The following forecast information has been extracted from departmental estimates for the year ended 31st March 2016 (the budget period): June Particulars Product M Product N Sales (units) 28,000 13,000 Finished goods stock increase by year-end Post-production rejection rate (%) 4 6 Material Z usage (per completed unit, net of wastage) 5 kg 6 kg

6 Material Z wastage (%) 10 5 Additional information: Usage of raw material Z is expected to be at a constant rate over the period. Annual cost of holding one unit of raw material in stock is 11% of the material cost. The cost of placing an order is `320 per order. The management of G Ltd. has decided that there should not be more than 40 orders in a year for the raw material Z. Required: (a) Prepare functional budgets for the year ended 31st March 2016 under the following headings: (i) Production budget for Products M and N (in units). (ii) Purchases budget for Material Z (in kgs and value). (b) Calculate the Economic Order Quantity for Material Z (in kgs). (c) If there is a sole supplier for the raw material Z in the market and the supplier do not sale more than 4,000 kg. of material Z at a time. Keeping the management purchase policy and production quantity mix into consideration, calculate the maximum number of units of Product M and N that could be produced. ( = 10 marks) Solution: (a) (i) Production Budget (in units) for the year ended 31st March 2016 Particulars Product M Product N Budgeted sales (units) 28,000 13,000 Add: Increase in closing stock No. good units to be produced 28,320 13,160 Post production rejection rate 4% 6% No. of units to be produced 29,500 28, Question no. 7. You are given the following data for the year 2015 of Rio Co. Ltd: Variable cost Fixed cost Net profit Sales 60,000 30,000 10,000 1,00,000 14,000 13, (ii) Purchase budget (in kgs and value) for Material Z Particulars Product M Product N No. of units to be produced 29,500 14,000 Usage of Material Z per unit of production 5 kg. 6 kg. Material needed for production 1,47,500 kg. 84,000 kg. Materials to be purchased 1,63,889 kg. 88,421 kg. 1,47,500 84, Total quantity to be purchased 2,52,310 kg. Rate per kg. of Material Z `36 Total purchase price `90,83,160 (b) Calculation of Economic Order Quantity for Material Z EOQ = 2 x 2,52,310 Kg x `320 = 16,14,78,400 = 6, Kg `36 x 11% `3.96 (c) Since, the maximum number of order per year cannot be more than 40 orders and the maximum quantity per order that can be purchased is 4,000 kg. Hence, the total quantity of Material Z that can be available for production: = 4,000 kg. x 40 orders = 1,60,000 kg. Particulars Product M Product N Material needed for production to 1,03,929 kg. 56,071 kg. maintain the same production mix 1,60,000 x 1,63,889 1,60,000 x 88,421 2,52,310 2,52,310 Less: Process wastage (10,393 kg.) (2,804 kg.) Net Material available for Production 93,536 kg. 53,267 kg. Units to be produced 18,707 units 93,536 kg. 5 Kg 8,878 units 53,267 kg. 6 Kg. 60% 30% 10% 100% Find out (a) Break-even point, (b) P/V ratio, and (c) Margin of safety. Also draw a breakeven chart showing contribution and profit. (5 marks)

7 Solution: P/V Ratio = S V = `1,00,000 - `60, = 40% S `1,00,000 BE point = F = 30,000 = `75,000 P/V ratio 40 % Margin of safety = Actual Sales BE point= 1,00,000 75,000 = `25,000 Question No. 8: Aditya Ltd. is engaged in heavy engineering works on the basis of job order received from industrial customers. The company has received a job order of making turbine from a power generating company. Below are some details of stores receipts and issues of copper wire, used in the manufacturing of turbine: Feb. 1 Opening stock of 1,200 `475 per kg. Feb. 5 Issued 975 kgs. to mechanical division vide material requisition no. Mec 09/13 Feb. 6 Received 3,500 `460 per kg vide purchase order no. 159/2013 Feb. 7 Issued 2,400 kgs. to electrical division vide material requisition no. Ele 012/13 Feb. 9 Returned to stores 475 kgs. by electrical division against material requisition no. Ele 012/13. Feb. 15 Received 1,800 `480 per kg. vide purchase order no. 161/2013 Feb. 17 Returned to supplier 140 kgs. out of quantity received vide purchase order no. 161/2013. Feb. 20 Issued 1,900 kgs. to electrical division vide material requisition no. Ele 165/ 2013 On 28th February, 2014 it was found that 180 kgs. of wire was fraudulently misappropriated by the stores assistant and never recovered by the company. From the above information you are required to prepare the Stock Ledger account using Weighted Average method of valuing the issues. (8 marks) Solution: Store Ledger of Aditya Ltd. (Weighted Average Method) Date Receipts Issues Balance of Stock Feb Qty (Kg.) Rate Amount Qty (Kg.) Rate Amount Qty (Kg.) Rate Amount , ,70, ,63, ,06,875

8 6 3, ,10, , ,16, , ,06,175 1, ,10, ,18, , ,29, , ,64, , ,93, ,200 3, ,26, , ,93,133 1, ,33, * ,611 1, ,48,688 *180 kgs. is abnormal loss, hence it will be transferred to Costing Profit & Loss A/c Question No. 9 (a) M Ltd. has an annual fixed cost of `28,50,000. In the year , sales amounted to `7,80,60,000 as compared with `4,80,60,000 in the preceding year The profit in the year is `37,50,000 more than that in Required: (i) Calculate Break-even sales of the company; (ii) Determine profit/ loss on a forecasted sales volume of `12,00,00,000. (iii) If there is a reduction in selling price by 10% in the financial year and company desires to earn the same amount of profit as in , what would be the required sales volume? (9 marks) Solution: (i) Break-even sales = Fixed Cost = `28,50,000 = `2,28,00,000 P / V Ratio 12.5% P/V Ratio = Change in Profit x 100 or `37,50,000 x 100 Change in Sales `7,80,60,000 - `4,80,60,000 Or, `37,50,000 x 100 or, 12.5% `3,00,00,000 (ii) Profit/ loss = Contribution Fixed Cost = `12,00,00, % - `28,50,000 = `1,50,00,000 `28,50,000 = `1,21,50,000 (iii) To earn same amount of profit in as was in , it has to earn the same amount of contribution as of Sales Variable cost = Contribution equal to contribution Contribution in = Sales in P/V Ratio in = `7,80,60, % = `97,57,500 Let SP p.u at present be 100 Contribution per unit 12.5 VC p.u Revised SP p.u. 90 Sales for earing Present level of = `97,57,500 x Profit = `35,12,70,000 Question No. 10 Arnav Motors Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto Parts Manufacturers Association, there will be a demand of 80 million pistons in the coming year. Arnav Motors Ltd. is expected to have a market share of 1.15% of the total market demand of the pistons in the coming year. It is estimated that it costs `1.50 as inventory holding cost per piston per month and that the set-up cost per run of piston manufacture is `3,500. (i) What would be the optimum run size for piston manufacturing? (ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run, how much extra costs the company would be incurring as compared to the optimum run suggested in (i) above? Solution: (i) Optimum run size or Economic Batch Quantity (EBQ) = 2 x A x S C Where, A = Annual demand i.e. 1.15% of 8,00,00,000 = 9,20,000 units S = Set-up cost per run = `3,500 C = Inventory holding cost per unit per annum = ` months = `18 EBQ = 2 9,20,000 units `3,500 = 18,915 units `18 (ii) Calculation of Total Cost of set-up and inventory holding Batch Size No. of setups Set-up Cost Inventory holding cost Total Cost

9 A 40,000 Units B 18,915 Units 23 9,20,000 40, ,20,000 18,915 80,500 (23 `3,500) 1,71,500 (49 `3,500) 3,60,000 40,000 x `18 2 1,70,235 18,915 x `18 2 4,40,500 3,41,735 Extra Cost (A B) 98,765 Question No. 11 Following is the sales budget for the first six months of the year 2009 in respect of PQR Ltd. : Month : Jan. Feb. March April May June Sales (units) : 10,000 12,000 14,000 15,000 15,000 16,000 Finished goods inventory at the end of each month is expected to be 20% of budgeted sales quantity for the following month. Finished goods inventory was 2,700 units on January 1, There would be no work-in-progress at the end of any month. Each unit of finished product requires two types of materials as detailed below: Material X : 4 `10/kg Material Y : 6 `15/kg Material on hand on January 1, 2009 was 19,000 kgs of material X and 29,000 kgs of material Y. Monthly closing stock of material is budgeted to be equal to half of the requirements of next month s production. Budgeted direct labour hour per unit of finished product is ¾ hour. Budgeted direct labour cost for the first quarter of the year 2009 is `10,89,000. Actual data for the quarter one, ended on March 31, 2009 is as under: Actual production quantity: 40,000 units Direct material cost (Purchase cost based on materials actually issued to production) Material X : 1,65,000 `10.20/kg Material Y : 2,38,000 `15.10/kg Actual direct labour hours worked : 32,000 hours Actual direct labour cost : `13,12,000 Required: Prepare the following budgets: (i) Monthly production quantity for the quarter one. (ii) Monthly raw material consumption quantity budget from January, 2009 to April, (iii) Materials purchase quantity budget for the quarter one. (9 marks) Solution: (i) Production Budget for January to March 2009 (Quantitative) Jan Feb Mar April Budgeted Sales 10,000 12,000 14,000 15,000 Add: Budgeted Closing Stock 2,400 2,800 3,000 3,000 (20% of sales of next month) 12,400 14,800 17,000 18,000 Less: Opening Stock 2,700 2,400 2,800 3,000 Budgeted Output 9,700 12,400 14,200 15,000 Total Budgeted Output for the Quarter ended March 31, 2009 = (9, , ,200) = 36,300 units. (ii) Raw Material Consumption Budget (in quantity) Month Budgeted Output (Units) Material 4 kg per unit (Kg) Material 6 kg per unit (Kg) Jan 9,700 38,800 58,200 Feb 12,400 49,600 74,400 Mar 14,200 56,800 85,200 Apr 15,000 60,000 90,000 Total 2,05,200 3,07,800 (iii) Raw Materials Purchase Budget (in quantity) for the Quarter ended (March 31,2009) Material X (kg) Material Y (kg) Raw material required for production 1,45,200 2,17,800 Add: Closing Stock of raw material 30,000 45,000 1,75,200 2,62,800

10 Less: Opening Stock of raw material 19,000 29,000 Material to be purchased 1,56,200 2,33,800 Alternative Solution (iii) Raw Materials Purchase Budget (in quantity) for the Quarter ended (March 31, 2009) Material X Particulars Jan Feb Mar Total Raw material required for production(x) 38,800 49,600 56,800 1,45,200 Add: Closing stock of raw material 24,800 28,400 30,000 83,200 63,600 78,000 86,800 2,28,400 Less: Opening stock of raw material X 19,000 24,800 28,400 72,200 Materials to be purchased X 44,600 53,200 58,400 1,56,200 Raw Materials Purchase Budget (in quantity) for the Quarter ended (March 31,2009) Material Y Particulars Jan Feb Mar Total Raw material required for production (Y) 58,200 74,400 85,200 2,17,800 Add: Closing stock of raw material 37,200 42,600 45,000 1,24,800 95,400 1,17,000 1,30,200 3,42,600 Less: Opening stock of raw material Y 29,000 37,200 42,600 1,08,800 Materials to be purchased Y 66,400 79,800 87,600 2,33,800

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