re: "...I am also starting to think its the master cylinder that's bad, even though its a reman. unit. I might have pushed to far and damaged it?..."

Assuming that you don't have defective rebuilt calipers (the "dot" thing that someone else suggested which would make it impossible to properly bleed air out of the system), then a damaged master cylinder is my confident guess. More on this below ....

First, though, good for you to have upgraded from solid to vented calipers -- although I didn't know there were any solid fronts anymore by '85.
And the "...the brake proportion valve thing (on the front of the car)..." isn't a proportioning valve -- the proportioning valves (actually pressure limiting valves) are fastened to your rear axle (two, one for each triangular brake circuit). That thing (often called the "octopus") in the front is a pressure comparator, a brake failure warning device that compares pressures in both independent, triangular brake circuits and, if there's a difference in pressure (because one of the systems is leaking, etc.) it will power the warning light that you have already triggered (viz., "...Brake failure warning light IS on!..."). More on resetting this warning light below, after you've fixed the pedal dropping problem.

But, to solve your pedal-to-the-floor problem, first realize why it happened. Your own phrase, "...I might have pushed to[sp] far and damaged it?...", tells me that you bled your brakes by having someone step on the pedal while you opened and closed the bleeders. Volvo master cylinders, especially old or rebuilt ones (except new ones, which you can't get for 240s anymore, anyway) are prone to damage by this technique -- pushing the pedal too far (to bleed) pushes the seals into corroded portions of the cylinder that scrapes and ruins their sealing properties (remanufacturers don't bother refinishing these corroded areas).
Even when I just replace pads, which always results in having to step on the pedal farther than normal to bring the caliper pistons back to the pads' backs, instead of one long (and potentially dangerous) press on the pedal, I instead always give it several short jabs (which cumulatively does the same thing) and thus avoiding pushing the master cylinder's piston too far. One can never be too careful about this.

And the only safe technique to bleed a Volvo is to use a positive-pressure bleeding device (one that pressurizes the master cylinder's reservoir, and thus the whole dual brake circuit lines) such as Motive's "PowerBleeder" that you can buy at many online sites including IPD. With this, you can bleed both circuits fast (and single handed) without stepping on the brake pedal (and thus without moving the master cylinder's piston, the important aspect of this technique).

Your present master cylinder is now toast -- get another remanufactured one, and be sure to get a "PowerBleeder" (or similar) before you install it.

And after you've fixed your master cylinder, then you can crawl under the car and temporarily unscrew the plastic central switch in your "octopus". Follow with a few quick stabs of your now firm brake pedal, and the octopus should reset itself (the central piston inside will self-center itself), after which you can rescrew in the switch assembly, reattach the wire and protective rubber boot, and you'll be all set to go.

Good luck.