[1] Normally you have to declare a function as 'static' to tell the compiler that the function isn't being exported form the compilation unit, since the compiler isn't supposed to be able to tell the difference between function declarations in the .c file itself and function declarations that were included from .h files. But in this case the function is just defined and never declared, so I presume that's the same as a static declaration.
However, the compiler is perfectly free to both compile it as an external function and inline it wherever it wants. Yes, setting breakpoints on such a function would be 'funny', but that's nothing of real concern to the compiler.
You can see this by inspecting the disassembly yourself, you'll see that printf never actually calls divide, and yet the divide function is still defined within the executable output.