I see the recommended oil is 40 weight motor oil. I used Hypoid.

what are you guys using 

Using a #40 - 50 motor oil isn't uncommon, even in the late 60's truck NP435 4 speeds call for #50 motor oil. Any 80-90 mineral gear oil is considered OK.
Just as a note: Gear oil and engine oil viscosity is measured differently and 80-90 is equivalent to 50 engine oil. I've been using 80-90 in all my trans since back in the 60's with no problem.
What you don't want to use is newer GL5 synthetic types or any for Hypoids. Newer trans that use GL5 types have blocker rings and not brass synchros.

I quickly looked over instructions. 23-b says that if lockout lever can be moved more than a 1/4 inch something is wrong.  Is that right or I'am  reading it wrong?  Bill Oregon

That's the way I read it, too. However that section is in reference to a misalignment of the OD to the main case when new. Unless yours has been apart and improperly reassembled causing a misalignment and everything works properly I wouldn't worry too much. These transmissions were last installed in new vehicles about 50 or so years ago, so there's bound to be some wear.