Heat oven to 350°F. Grease two 9 x 5-inch loaf pans. Prepare cake mix according to package directions, using pound-cake variation (add instant pudding and an extra egg). Pour into pans and spread evenly; bake 40 to 45 minutes, or until a toothpick inserted in center comes out clean. Transfer to wire rack, and cool 15 minutes. Invert cakes onto rack and cool completely.
With serrated knife, trim top of cakes to level them. Place cakes end to end, with short sides touching on serving plate. Trim a thin wedge-shaped slice off 1 half of long side of cake to form xylophone shape. Frost completely with vanilla frosting. Pipe black decorating icing around edge of cake top, down corners, and along base.
Divide fondant into 8 pieces. Tint each piece with food coloring to make 8 bright colors. Using a rolling pin, roll each piece of colored fondant to an 1/8-inch thickness. Cut first piece into a 4 x 2-inch rectangle. Make each rectangle slightly smaller than the previous one to shape into keys for the xylophone. Line up keys on cake, and place 1 brown M&M on each end of keys to look like nails.
Press a Twizzler into each marshmallow to make drumsticks. Dip marshmallows in water and shake off excess. Dip in colored sugar. Place next to cake. Make a bow and pull string with licorice; fasten to end of xylophone.