I think it's because it's so simple that it's overlooked. You're dipping men and women into FEV and turning them into super-soldiers. The fact that both sex are being transformed would eliminate the whole issue of reproduction from your mind. The guy thinks that super-mutants are the next step in evolution, not a bad thing that would cause sterility.
Nope, sorry, it still doesn't make sense.
What they should have done is introduced some sort of subplot where the Master was growing out of touch with the outside world and his supermutant minions (such as Lou) were actually HIDING their own infertility from him, in fear that he would destroy them all if he found out.
(He still should have found out about it earlier, though. Maybe make it something that developed later?)