Sure m8, Theres a program called autogk that is easy to use and also lets you choose whether you want to use ac3 5.1, or mp3 as the audio codec. You might have to look around and download the ac3 codec.
i would say if you got it from dvds its better to keep it as it is in AC3. xvid is only a video compression tool. nothing to do with audio. so take the audio and mux it