Having conducted tests for our Grand Poobah Brian Price, I have found out of the following (nothing has been fixed yet) - please corract me if I'm wrong about something.
Whenever someone fires at infantry there are two kinds of damage: from DIRECT fire and from SPLASH.
If the shell/guns hit the infantry while firing directly, there will be calculated damage based upon KILL ratio for the weapon. The infantry will *only* take damage if the HIT probability is satisfied.
Units around the target will be affected by SPLASH damage. The higher the KILL ratio, the more SPLASH damage. Also, the higher the WARHEAD, the greater the area of effect - so MG's with WARHEAD=1 will only kill infantry units in the same hex as the target, while Sturmtigers with 38cm Mörser that have WARHEAD=21 will kill infantry up to two hexes away!! This kind of damage "always" hits no matter hit proability, but does not always cause casualties.
The problem in SPWAW is that ***the directly targetted unit will NOT suffer splash damage***. Therefore a number of well-known "insects" roam around: when two infantry units are in the same hex and well dug-in, the TARGETTED unit will not be likely to take damage because of low hit percentage. But the other one will suffer SPLASH damage and therefore be hit more often!
This is known with small arms fire as well as large Infantry Guns: if you target a squad with the 38cm Mörser and have 20% chance to hit, there will be only 20% chance of causing casualties! But other squads nearby will almost surely suffer at least 1-2 or up to about 10 casualties I have seen - while the targetted unit is still in good health!
Attacking a hex with direct fire (Z key) will apply SPLASH damage to all units in the area but of course no direct damage. For small Hit Percentages it is easier to cause casualties with SPLASH damage than by directly targetting!
If this is to be fixed, all that must be done is to apply SPLASH damage directly to the targetted unit as well as the others.
(It should be added that these figures AFAIK apply to ALL weapons in the game - small arms, guns, bombs etc.)