Requirements:

1. Avidemux
2. CCCP or KLite MegaCodec Pack



First, open AviDemux and the file you want to encode.
If you open an XVID file, it'll show you this:



Select Yes.
Now on the left part, you'll see the configuration.
Choose MP4 or MKV(only if there is an MKV option. In the most recent version, this option is available.)
For Audio and Video, select LAME and x264. It's depends on you on what Audio output you want. It can be FAAC if you wish.



Then on Configuration under Video, on Bitrate Tab, change the Encoding Mode to Two-Pass.
For Dual Pass, you'll have to input what bitrate you desire. I suggest 255+. The bigger the bitrate, the greater the output quality.
In anime, when there's fighting choose, I'd most likely choose 268 to keep the quality as input.
Then click OK.



On Filters under Video, on Transform menu, choose MPlayer resize. This is optional though. That is if you don't want to change the
output resolution of you video.
Since I'm more into 640x480. I chose it. You can choose whatever you want. Then OK->Close.



Now you see the video will be resize from it's original to your desired output.



On Configuration under Audio, follow the settings below. Or you can do your own if you want a different settings.
You're not limited to LAME only. You can also use AAC for this.



Then on Filters. Still under Audio. Copy the following. Or you can retain 48000hz on Resample.



Now it's time to start encoding. Click Save just below the menu and Name your Video. don't forget to put the extension.
Either MP4 or MKV. In case you want to know, MKV is just a container, so it doesn't matter if your codec is for MP4.
If you want MKV as the container for you video. Then put it as the extension.



You'll see this when your encoding starts. The speed of encoding depends on the capacity of your CPU and Memory.
And since it's Two-Pass, it'll repeat encoding after it reaches 100%. Usually for a 170mb file, the output may be from 45mb-60mb.
It still depends on the bitrate you chose earlier in the video configuration.
If you see in the Total Size something larger than 60mb, don't worry, like I said, it's just the first pass, when it go around in the second pass, the size will change to depending on the bitrate.



So that's all. If you don't like AviDemux, you can try MediaCoder. It also has lots of features like AviDemux and a Freeware too.
Good Luck in Encoding.