OK, here's the follow-up:

We bought a new Dorman brake master cylinder. Not the highest quality part available, but it's what we could get same day. Installed it and bled the master cylinder on the car. With the new master on, it still gave us the Brake Failure light. Reading through the factory manual, it seems that repairing a leak and bleeding the brakes should reset the light. Ours didn't.

So, we decided we would take the Octopus apart. It's not a particularly complicated part. And upon opening it up, it was easy to see that ours was hung up. So, we cleaned everything up, cleaned up the bore and sliders and seals. We annealed the copper crush washers on each end and re-assembled. Interestingly there really wasn't much wear on the parts at 285,000 miles. I guess if the brakes are functioning properly, the octopus doesn't really do much.

Obviously, we bled the system (again) using the the Volvo factory manual recommended procedure and a pressure bleeder. I think the pedal pumping while pressure bleeding is really effective. Got lots of bubbles out.

So, the answer to our problem was both the brake master and the octopus. Both required attention. There is about 3/4" of travel before the pedal gets very firm. Problem solved.

Could still be air in the lines, but I suspect the master cylinder is now gone. The cylinder gets corroded and grungy with age and you've now fully depressed the pedal a number of times doing the bleeding so may well have damaged whatever little was left of the piston seals. That's not a crime now having to replace it as in a panic stop it may well have had a sudden failure.

Unless the junction block is leaking they can normally be reset, if necessary by removing the switch and encouraging the little tapered piston between the two curcuits back into its neutral position. Some go so far as to temporarily crack open the output lines on both sides to let it bleed a bit while you stomp on the brakes trying to reset it.

I also prefer power pressure bleeding, although many prefer vacuum bleeding using something like the MityVac kit. For power bleeding you will ideally use something like 18-35 psi to push air out of the system and not just trickle fluid past any air pockets. If needed, tap hard on the calipers, hard lines, junction block and even the master cyl with a mallet to dislodge any air bubbles clinging to the walls. Unbolt the calipers and hang them up high for a moment during bleeding to make sure there are no air bubbles caught in the upper bend of the brake hose.

Just be glad you don't have ABS as when you let the system run dry then that adds a whole level of complexity as to where air bubbles might be hiding and the Volvo ABS units don't have bleeders on them

The bleeding sequence is only mildly important and there are often a number of published ways to do it, the main thing being doing the furthest bleed nipples away from the MC first, ie. the right rear first then both rears before doing the fronts, noramlly right front then left front. With the 240 triangular brake circuits it doesn't really matter whether you do the upper or lower fronts first, but most procedures will have you doing the uppers first. I always prefer to waste extra fluid and do the rears, then the fronts and then the rears again just in case a little bubble gets caught at the junction block.
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Dave -still with 940's, prev 740/240/140/120 You'd think I'd have learned by now