I tried the terminal:
chdir the the drive with the xip file.
The external drive with the xip has 279GB free space
Entered; xip --expand XCode-12.5
The expand failed for lack of space.
I changed the startup drive to one that has more free space than my usual startup drive.
Entered; xip --expand XCode-12.5
It worked!
Evidently xip needs space on both the drive with the xip file and the startup drive.
Sxb
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I am running iOS 15.7