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Drop the lowest grade from a Grade Category

Go to Course Admin -> Grades -> Manage Grades tab

Click New to create a new category, or go in to Edit your existing category.

Scroll down to Distribution. If you are dropping the lowest grade, the weights will need to be distributed evenly across all grade items in that category. Indicate how many low grade items will be dropped from the category.

This example treats all grade items equally, and drops the lowest grade.

Be sure to click Save once you have made all the selections for your Category.