Theory:

“Ah, Dorset,” he smiled. “I know this place. I know it very well.” We shared my rum ration and his excellent sausage. And we talked, Connie, how we talked. He spoke almost perfect English. But it turned out that he had never set foot in Dorset, never even been to England. He had learned all he knew of England from school, and from reading books in English. His favourite writer was Thomas Hardy, his favourite book Far from the Madding Crowd. So out there in no man’s land we talked of Bathsheba and Gabriel Oak and Sergeant Troy and Dorset. He had a wife and one son, born just six months ago. As I looked about me there were huddles of khaki and grey everywhere, all over no man’s land, smoking, laughing, talking, drinking, eating. Hans Wolf and I shared what was left of your wonderful Christmas cake, Connie. He thought the marzipan was the best he had ever tasted. I agreed. We agreed about everything, and he was my enemy. There never was a Christmas party like it, Connie.
Explanation:
  
Wolf recognized Dorset (a place in England). He said he knew the place very well. They shared Jim's rum and Wolf's sausages. Jim wrote that he had a very good conversation with Wolf. He mentioned that Wolf spoke perfect English, as Europeans generally don't speak perfect English. Wolf had never been to England, and what he knew about England was from reading English books in school. Wolf's favourite author was Thomas Hardy, and his favourite book was Far from the Madding Crowd. They spoke about so many topics that included fictional characters (Bathsheba, Gabriel Oak, Sergeant Troy) from his favourite book. They also spoke about the place Dorset. It meant they had developed a friendly relation despite being enemies. Jim learnt that Wolf had a wife and a six-month-old son. As Jim examined the crowd beside him, all khakis and greys were huddled up everywhere in the no man's land - happily laughing, smoking, talking, drinking and eating. Jim and Wolf shared the remaining cake that Jim had, baked by Connie. Wolf loved the marzipan on the cake and said it was the best he ever had. Jim wrote that they both had a lot in common, and agreed upon most things - but ironically, they were enemies. Jim wrote that he hadn't had a better Christmas party.
 
 
Meaning of difficult words:
 
Words
Meanings
Looked about me To examine or investigate (someplace or area) in order to locate someone or something.
Marzipana sweet covering on a cake made from sugar, eggs and almonds
 
Reference:
National Council of Educational Research and Training (2008). Honeydew. The best Christmas present in the world - Michael Morpurgo (pp. 9-16). Published at the Publication Division by the Secretary, National Council of Educational Research and Training, Sri Aurobindo Marg, New Delhi.