@Morbid_Charade I see, Child's Room 1.
The mental state theory does seem to offer a better interpretation. Little brother wakes up genderswapped. He already had a somewhat crazed and jealous mental state, as shown in the end after the big brother confronted him about having murdered his wife and child. Like you said the little brother survived everything. I also think he might be the real creator of the delusion and not the big brother.
His unconscious wish could have been to dispose of? all suspects & witnesses (including Usagigasaki who only he knew about) and go back to his old relationship with his big brother acquitted of the crime. AFAIR no one knew what would happen if the creator of the delusion was the last surviving person..
The alternate dimension haphazardly seems to be reflecting what could be some of his subliminal desires - him waking in the child's room, being a girl/child etc. Having lost his memory is beneficial to him, since his past self can be discarded and so on. Everything is going 'fine' until the monster shockingly appears through the door opening.
Anyway, thanks for translating it again, it was an interesting read.