Transportation for Switzerland & Austria

First, why can't I have friends in Berner Oberland?! It sounds like an absolutely glorious trip!
I don't think I'd opt to rent a car. For the passes, unfortunately, you have to add it all up. There is a BO pass, a Swiss Pass, a half fare card and I think some kind of family card. Some of what you will eventually choose is weather dependent. I wouldn't go up the Jungfrau unless the weather is clear. It's expensive. I do believe there is a discount with the Swiss Pass. The trip to Schilthorn is completely included in the Swiss Pass.
For Austria, you can take a train from Salzburg to Munich on a Bayern ticket which ends up to be super cheap for a family. There are only certain times you can travel, but I've never run into a difficulty. I know from Salzburg to Vienna, you can save a lot of money by buying OBB tickets in advance. Otherwise there is a newer and cheaper train company, Westbahn that you might check. If you are going to fly out of Munich, I would go to Vienna after Switzerland, and then Salzburg to Munich.
I have had good experiences with Autoeurope. However, I've never rented a car and then used it in multiple countries. I don't think you need a car for Austria unless you'd like to venture out a bit in the Salzburg area.

Renting a car in one country (Switzerland), and returning it in another (Austria) usually attracts a large surcharge. I would get an estimate as to how much this costs.

Where exactly do your friends live and is it near a rail station? That would greatly affect my decision whether to go by car or train. Major train hub within walking distance - go by train; bus that takes 45 minutes to get to station that is on a branch line so you always have to travel via XXX and change trains - good argument for a car.

I was in Austria this past spring, and for us [living on the west coast,] there were many more convenient flight options out of Munich than Vienna. Obviously, I don't know your location.
We were in Switzerland last year on the RS Swiss Tour, and flew into/out of Zurich, which was an easy airport to navigate. So nice to have the train connection right in the airport.
We bought the Swiss Half Price Card, and that worked well for us, being on a tour part of the time. It was just nice to experience so many modes at a discount. You'll just have to plan your itinerary, and do the math. Of course, weather is the unknown factor, and no one can plan for bad weather that may interfere with planned boat rides and mountain-top lifts. However, most of your days will be beautiful and the sites breath-taking.
You will LOVE both countries!

Thanks for all the information and pointers!

Yes, it was my thought that there would be more flight options out of Munich than in Vienna.

Our friends are in Frutigen , near Spiez. From a map it appears that a rail line goes right to Frutigen. So we will have easy access to transportation while in Switzerland.

For Austria this is what we would like to do: (but obviously things can change )
Spend 6-7 nights in Zell am See. Enjoy a few days in Zell am See hiking & biking around the lake plus we would like to use Zell as a hub for day trips to Werfen's Ice caves , Salzburg and we would REALLY love to drive the Grossglockner Alpine road ourselves instead of a bus tour. That's where I am conflicted about a car rental. I hopped on auto europe's website and messed around with pick up locations / drop off locations & dates. There was nothing available for Zell am See for 1-2 days. Which then had me wondering if it would just be easier to pick up a car before getting to Zell - say in Innsbruck maybe? Having a car for the full week or longer if needed. When we leave Zell , enjoy a slow drive through the southern part of Austria to Vienna , dropping the car there. When we leave Vienna take the northern part of Austria by rail to Munich. Does this sound realistic and a workable plan?
We would consider using rail the whole time in Austria , but we are really hoping to get a car for the Grossglockner road and drive it ourselves. That's the missing piece. I'll try auto Europ's website again and see if I can find anything for 1-2 days.

Has anyone done the Grossglockner Alpine road by rental car? Is it harder to get a car for just 1-2 days instead of a full week ?

It is easy to get a car for 1 or 2 days. But if it is a local agency, they may actually own the car and need it returned to the same location. Their hours may be normal hours like week days with a 2 to 3 hour lunch break, close by 5 or 6 pm and not be open at all on Sundays.

The Swiss Family Card is free when the parents buy either a Swiss Travel Pass or Half-Fare Card for visitors. Regardless of whether the adults are getting full coverage from their pass or buying a discounted ticket, their kids under age 16 will be free on all Swiss transportation.

At the least, a Half-Fare Card will be cheaper than buying full-fare tickets for multiple mountain excursions. Swiss Travel Passes tend to be for 4, 8, or 15 days, either consecutive or flexi options, so if you can get in and out within 8 consecutive days, that version could be convenient but not necessarily cheaper. Passes may occasionally have special offers sold in early spring, for instance with extra travel days.