I do this for my kids all the time, I usually use Nero. Create an ISO, add divx/xvid files and burn. Can normally get 5-6 movies on one disk.
I previously posted in another thread that you have to remain connected to live to use divx/xvid codec which is downloaded. This is not the case. I remembered that although I have set up a Xbox Live account for my son some time ago and downloaded the codec, he hasn't been connected to live since but is using that profile offline to get around the DRM.