Your layshaft has too much endfloat, this could cause first gear to start jumping out of gear, you need to take the outer and inner cover off and use some iso shims to reduce the endfloat to about 10 thou.
After a hand full of long past gear box issues I ran out of gaskets and asked 3 different lists and hand full of vendors if an issue w/o gaskets and was told its was old method many used [back then] to avoid need of shims. W/o gaskets mine gives slight slack below 1/16". Could combine shim and a gasket or two out to fine tune.
I agree. Not uncommon. The only ill effect may be on the kick shaft pawl where it engages into the 1st gear lay. I also think 1/8" may be a bit an exaggeration, or maybe not.
Also, I think shimming to .010" is way too tight. .030" is more realistic to me. As hobot said, most of this play can be eliminated by thinner gasket at the inner cover or no gasket at all.
Complete rebuild kits are available (Norvil, RGM) with roller or Good ball layshaft bearings.
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