It's surprisingly easy. If you are extracting/converting the video and audio from a MKV file to an AVI, first load the MKV into VirtualDubMod. Then follow the steps for using LameACM to compress your audio to MP3 as shown in EADFAG here: Using LameACM to Compress your Audio in VirtualDubMod
, disabling any unneeded streams. Now go to File > Save As...
The Save as type:
should be AVI as default. Change the Video Compression
settings as needed, then click Save
At the worst case, you'd have to have VirtualDubMod output the audio as a WAV file and then re-import it into VDM, use the LameACM to compress it into MP3 audio then mux it into the final AVI file. OR convert the WAV to MP3 with BeSweet then mux it with VDM.