What is an Xref?
An Xref is an External Reference. Basically you can have a "dwg" that has an xref of another drawing, you can see the xref'd "dwg" but it's stored in its on file.

Why do we use Xref?
I usually use them to reduce file size and for easier Maintenance. Update the xref'd file and all the "dwg's" that point to it are updated

What is the best situation to use an Xref?
You'll have to make that call :)